The S&P 500 is just 2% from its all-time high, yet 84% of its constituents are in a bear market, with 10 stocks such as Nvidia contributing 70% of the gains. This bizarre paradox of bulls and bears coexisting is creating a historic opportunity. The AI revolution is driving a 52% surge in earnings, while large-cap tech valuations are actually cheaper. The hidden discount embedded in the current market bottom may be building momentum for an explosive move in 2027.
Author: The Kobeissi Letter
Compiled by Odaily Planet Daily Golem
The Kobeissi Letter receives thousands of questions every week, but recently one question has appeared most frequently: with oil prices above $100/barrel, borrowing costs back at 2002 levels, and inflation nearly twice the Fed's 2% target, why can the S&P 500 still remain only about 2% away from its all-time high?
What would you think if we told you that the S&P 500 could be near an all-time high while still being at a "bottom"? But that is exactly the case, and The Kobeissi Letter believes this is one of the most important opportunities in today's market.
We are witnessing a historic market paradox: a market state of "bulls and bears coexisting." The following article will elaborate on the meaning behind it.
Iran War — Day 229
The S&P 500 since February 28
Today is Day 229 of the Iran war. Since the war began, the S&P 500 has risen 900 points. Since hitting a low on March 30, the index has risen nearly 1,500 points, adding $14 trillion in market value.
Compared with 229 days ago, the world today has changed dramatically. Inflation has nearly doubled, the Fed is raising rates, we are deep in the worst energy crisis in world history, and at the same time we are also in the midst of the largest technological revolution in world history.
Yet if most investors were asked, they would generally believe that the market's fundamentals have deteriorated compared with eight months ago.
Macroeconomics — A Historic Shift in Expectations
In early 2026, the market expected the Fed to cut rates at least three times this year, for a total of 75 basis points. This had been a core element supporting the bullish case for stocks, with investors at the time expecting a lower cost of capital, increased investment activity, and technology companies posting record-high capital expenditures (CapEx).
Fed rate expectations (October 15, 2026)
So far this year, the Fed has raised rates once, and the market expects three more hikes by June 2027. Including the September hike, the total increase will reach 100 basis points. This means rate expectations have undergone a dramatic 175-basis-point shift. Yet the S&P 500 remains at an all-time high.
Brent crude, 10-year Treasury yield, diesel
The factor driving this shift is the historic surge in oil prices. Diesel prices have risen more than 80% from their January 2026 lows, while Brent crude has reached $106 per barrel. With inflation doubling, the Fed continuing to raise rates, and the U.S. fiscal deficit approaching $2 trillion, borrowing costs have soared. Nevertheless, the S&P 500 is still at an all-time high.
So why exactly?
Most S&P 500 constituents are underperforming
Although the S&P 500 is at a new high, the vast majority of its constituents are trading far from their all-time highs.
Share of S&P 500 stocks down 10% or more
As shown in the chart above, 84% of S&P 500 stocks are currently at least 10% below their all-time highs.
Real estate leads the declines, with 97% of stocks down at least 10%, followed by materials (96%), utilities (94%), and consumer discretionary (92%). In addition, 59% of S&P 500 constituents are at least 20% below their respective highs, 41% are down more than 30%, and 17% are down more than 50%.
Below is the contribution to returns since the S&P 500 bottomed on March 30.
S&P 500 return contribution (since the March 30 bottom)
Since March 30, 70% of the S&P 500's gain has come from just 10 stocks. During this period, the S&P 500 rose 23% in total, and these 10 stocks contributed 16 percentage points of that. Among them, Nvidia (NVDA) contributed the most, accounting for 13% of the S&P 500's gain, or 3 percentage points.
Then came Micron Technology (MU), Apple (AAPL), and Microsoft (MSFT), each contributing 9% of the S&P 500's gain, or 2 percentage points each. AMD (AMD) and Alphabet (GOOGL) accounted for 8% and 7% of return contribution, respectively.
At the same time, the other 490 stocks accounted for only 30% of the S&P 500's gain since March 30, contributing 7 percentage points.
Therefore, the "majority" of S&P 500 constituents are actually in a bear market, which in our view is actually a positive for the S&P 500. We will explain why below.
The S&P 500 should have been above 9,000
Without the impact of the Iran war, the S&P 500 could have reached above 9,000.
This may be the most resilient asset in history. Despite inflation near 4%, rising gasoline prices, and the Fed raising rates, the S&P 500 is only 2% away from its all-time high. Imagine how high the S&P 500 could reach if the Iran war ended, oil prices fell back, and the Fed returned to a rate-cutting path.
Over the past seven months while the Iran war has continued, corporate earnings growth has been unprecedented. In the second quarter of 2026, the S&P 500's blended earnings growth rate reached 52%.
S&P 500 earnings growth (Q2 2026)
This is the highest growth rate since the second quarter of 2021. At that time, the global economy was recovering from historic lockdowns, and the U.S. government had also launched a $4 trillion stimulus package.
In other words, against the backdrop of a global energy crisis and a Fed rate-hiking cycle, the level of growth we are seeing is actually comparable to the growth brought about by that more than $4 trillion stimulus plan and the restart of the global economy after a near-standstill.
The fact is that the outlook for AI is stronger than most people realize, and although inflation has remained above 2% for 67 consecutive months, corporate earnings growth is enough to support this bright outlook.
Nvidia P/E ratio
Take Nvidia's trailing 12-month P/E ratio, for example. Although its stock price rose 21% during this period, the company's P/E ratio actually fell 46%. Currently, Nvidia's forward P/E is about 24 times, roughly in line with the S&P 500's 22 times, but consider that Nvidia's stock price has risen 900% cumulatively over the past five years.
This is true for many large-cap tech stocks, and it is precisely these stocks that are supporting the entire market.
As shown in the chart below, the S&P 500 and the S&P 500 Information Technology sector currently have almost identical forward P/E ratios. Historically, these stocks have usually traded at valuations above the S&P 500 as a whole.
S&P 500 and S&P 500 Information Technology sector forward P/E ratios
In the view of The Kobeissi Letter, the large-cap tech stocks driving the market higher, despite trading at or near all-time highs, actually already contain considerable discounts in their valuations. We believe that without the macroeconomic factors of the past seven months, these stocks would be trading much higher.
Add to that the fact that more than 80% of S&P 500 constituents are down more than 10% from their all-time highs, and the argument becomes even more compelling. Once market breadth—that is, the number of stocks participating in the rally—improves even slightly, buying pressure will increase rapidly. Moreover, even without such a shift, the large-cap tech stocks that have dominated most of the price action also look relatively "cheap" compared with the S&P 500 as a whole.
This is why we believe that, for the S&P 500, market concentration is actually a positive and, at least at the current stage, does not pose a problem.
The March 30 bottom was a "gift" to investorsPreviously, when the S&P 500 index fell below 6,400 points, The Kobeissi Letter issued a strong buy signal for the index and even for the entire stock market. In an article at the time, The Kobeissi Letter pointed out that the bond market was one of the core reasons for the bullish outlook, and that the sell-off in tech stocks, which had dragged down the overall stock market, also seemed irrational.
Subsequently, the S&P 500 staged a "V-shaped" rebound, and The Kobeissi Letter continued to raise its target for the S&P 500 to 7,800 points, while predicting that the Trump administration would intervene in the bond market.
Now, the Trump administration is indeed trying to intervene in the bond market (although it has not yet worked), and further intervention measures are inevitable. Ultimately, The Kobeissi Letter's bullish view on the S&P 500 today was formed on March 30, and as we look ahead to 2027, this view is becoming increasingly validated.
Investors seek more asset allocation
In addition to the "discount" factors already present in the stock market mentioned above, in the face of persistent inflation in the United States, investors are more inclined to hold various types of assets.
The U.S. CPI inflation rate has been above the Federal Reserve's 2% target for 67 consecutive months. The last time U.S. inflation was below 2% was in January 2021, when the global economy was in lockdown.
The dollar's purchasing power has shrunk since 2021
During this period, the value of the dollar has shrunk by 22.5%. In other words, goods and services that cost $100 in 2021 now require $129 to buy. Therefore, over the long term, investors will not reduce but rather prefer to increase their holdings of stocks and physical assets.
Therefore, if there are signs that the Iran conflict is ending and the global energy crisis is easing, it will trigger a chain reaction that pushes the market toward a bull market.
Energy prices will then fall, inflation expectations will also decline, the Federal Reserve's monetary policy stance may shift toward a more "dovish" position, the "discount" factors present in tech stocks will be eliminated, and the breadth of the market rally will further expand. At the same time, the AI revolution is still accelerating, and many large tech stocks, despite rising share prices, have actually become more attractive in valuation based on expected earnings (that is, they have become "cheaper").
In addition, from a macroeconomic perspective, market demand for asset holdings is also at a historic high.
We are at the bottom of a bull market
In summary, we believe the S&P 500 index is in a "bear market within a bull market."
The S&P 500 bull market enters its fifth year
Although the S&P 500 bull market has continued into its fifth year, The Kobeissi Letter believes that there is still significant "discount" space in the current stock market. This discount phenomenon is like an "invisible" bear market, suppressing the stock valuations of the world's largest and fastest-growing companies.
Against this backdrop, once conditions are ripe, the S&P 500 index is highly likely to usher in a sharp rally, and 2027 will be a year full of major variables.