The Compound
A Year-End Rally Could Double The S&P 500's Gain This Year
10/20/2025, 9:00:14 PM
Economic Summary
- The 10-year average S&P EPS (roughly $167) understates recent earnings power; the last five years average about $232, ~39-40% higher, implying a lower effective Shiller CAPE (around 28–29) when using recent earnings.
- Consensus 2026 S&P EPS of $304 at a 24x multiple implies roughly 9% upside from current levels, requiring about 14% EPS growth from this year to justify that valuation.
- Historically the S&P peaks in Q4 (~71% of the time since 1980) and Q4 peaks are associated with positive double-digit annual returns (roughly 19–22% average), consistent with the current year-to-date gain (~13.3%).
- The five big hyperscalers (Microsoft, NVIDIA, Amazon, Alphabet, Meta) generated about $570 billion in operating cash flow, with roughly $325 billion going to CapEx, ~$170 billion to buybacks, and ~$41 billion to dividends, showing ample cash to fund AI investments and shareholder returns.
- Company spending patterns differ: NVIDIA spends only ~5–7% of cash flow on CapEx and returns much to buybacks; Amazon reinvests almost all cash flow with no buybacks or dividends, requiring higher incremental returns on CapEx (estimated ~30%).
- Estimated incremental returns needed to justify current CapEx for most hyperscalers are modest (generally single-digit to mid-teens percent), meaning aggregate financials may obscure which specific AI projects succeed or fail.
Bullish
- Big tech generates massive operating cash flow and can fund AI CapEx and buybacks.
- Resumption of corporate buybacks could support equities into year end.
- Strong recent S&P EPS (five-year average) makes valuations less alarming.
Bearish
- Shiller CAPE using 10-year earnings may overstate valuations if earnings power fades.
- If S&P earnings growth stops, high valuations could quickly reverse.
- Federal Reserve rate hikes were the catalyst that toppled prior tech bubbles.
Bullish tickers
MSFTNVDAGOOGLMETAAAPL
Bearish tickers
AMZNOPENAI
MSFT
Bullish
Generates significant operating cash flow and is a major AI hyperscaler able to fund CapEx and shareholder returns.
Bearish
Potential concerns about ROI on large AI CapEx could be hard to detect in aggregate numbers.
NVDA
Bullish
Low CapEx share and strong cash generation enable large buybacks and support continued AI-driven growth.
Bearish
If AI spending disappoints, visibility into project-level ROI is limited and could fuel negative narratives.
AMZN
Bullish
Massive reinvestment could compound returns if CapEx into AI and infrastructure pays off.
Bearish
Reinvests nearly all cash flow with no buybacks or dividends, so shareholder returns depend on high CapEx ROI.
GOOGL
Bullish
As a hyperscaler, strong cash flow supports AI CapEx and sustained competitive position.
Bearish
Aggregate accounting may mask underperforming AI projects, making negative surprises possible.
META
Bullish
Part of the big-tech cohort generating large operating cash flow to fund AI investments and returns.
Bearish
High spending into new initiatives could attract scrutiny if incremental ROI is unclear.
AAPL
Bullish
Would add ~$100 billion operating cash flow to the hyperscaler cohort and supports shareholder returns.
Bearish
Not included among AI hyperscalers in this discussion; slower AI-related upside relative to hyperscalers.
ORCL
Bullish
Could become more relevant to AI infrastructure narratives over time.
Bearish
Mentioned as a late arrival to the AI story with potential execution scrutiny.
JPM
Bullish
Used as a capitalization comparison to illustrate the scale of hyperscalers' cash flow.
OPENAI
Bullish
If audited and productive, OpenAI investments could underpin significant AI-driven growth across partners.
Bearish
Uncertainty over auditing and internal ROI transparency raises governance and execution questions.
People mentioned
Michael BatnickRabeNick