NextFin News - The S&P 500 is trading near record highs while the 10-year Treasury yield sits at 4.73%, a combination that would normally set off alarms in any strategist's shop. Yet Cameron Dawson, chief investment officer at NewEdge Wealth, argues the opposite: earnings are strong enough to make rising rates tolerable for equities. There is a catch, and Dawson put it bluntly in a Sept. 1 television appearance: "2Q is likely the peak in earnings growth rate." The market's ballast against higher rates may already be at its maximum size — and the question now is whether profits can keep growing fast enough to justify a 20-times forward earnings multiple as borrowing costs climb.
The Setup: Records in Stocks, Pressure in Bonds
The backdrop is a market that has refused to break. The S&P 500 closed at a record 7,798.99 on Aug. 13, and even after pulling back to 7,675.70 by Aug. 26, the index remained up about 12% on a price basis for the year. Meanwhile, the bond market has been repricing toward restraint. The 10-year Treasury yield finished Aug. 28 at 4.73%, up roughly 41 basis points from a year earlier. The Federal Reserve held its benchmark rate in a 3.5%-to-3.75% range at the July 29-30 meeting, but only by a 9-3 vote, with three members pushing for an immediate 25-basis-point increase. Market-based trackers showed the odds of a hike at the Sept. 15-16 meeting fluctuating through the month — falling to 42% after softer July inflation data, then rising to roughly 57% after the Jackson Hole symposium in late August.
Normally, that is the setup for a de-rating. Higher risk-free rates cut the present value of future cash flows, and a 20.0 forward price-to-earnings ratio — above both the five-year average of 19.9 and the 10-year average of 19.0, per FactSet — leaves little room for error. Dawson's argument is that the error margin does not matter as much as long as the denominator keeps expanding. Earnings, not multiples, are doing the heavy lifting.
And the earnings numbers are, by any measure, extraordinary. NewEdge's own Aug. 7 analysis, drawing on FactSet data as of July 31, put second-quarter headline EPS growth for the S&P 500 at 47.4% year over year, against 23% expected at the start of the reporting season. FactSet's Aug. 7 update revised the blended growth figure up to 50.4%, the fastest pace since the 91.6% rebound in the second quarter of 2021. Eighty-six percent of reporting companies beat estimates — the highest beat rate since that same quarter in 2021 — and the average magnitude of the surprise, 29.2% above consensus, was the largest since FactSet began tracking the metric in 2008.
"2Q is likely the peak in earnings growth rate."
That is the line that turns a celebration into a warning. If Dawson is right, the best earnings news is already in the tape. The market's tolerance for rising rates depends on a profits engine that has just passed its high-water mark.
What Is Actually Driving the Earnings Surge
The first thing to separate is how much of this growth is operational and how much is accounting. A substantial slice of the second quarter's headline number came from non-operating, unrealized investment gains at two mega-cap names. Alphabet recorded a $98 billion gain in other income, mostly from net unrealized gains on equity securities. Amazon posted a $53.4 billion gain in other income, driven largely by its stake in Anthropic. NewEdge calculates that stripping out Alphabet and Amazon pulls the index's year-over-year earnings growth down from roughly 47% to 28%. FactSet, using its blended figure, puts the same exclusion at 32.0% instead of 50.4%.
Even the adjusted number is strong. Twenty-eight to 32% growth in an index that is not emerging from a recession is, by any standard, robust. BlackRock noted that S&P 500 earnings excluding the "Magnificent 7" still grew about 31% in the quarter, and that profit margins hit nearly 17% — the highest in more than 15 years. Ten of the eleven sectors reported year-over-year earnings growth, and eight of those posted double-digit increases, led by Energy, Communication Services, Consumer Discretionary, Information Technology, and Materials. This is not a narrow rally confined to a handful of AI beneficiaries.
But the composition matters for what comes next. Part of the strength is simply nominal. NewEdge highlighted that nominal GDP accelerated to 6.5% year over year in the second quarter — an 8.1% annualized rate — and that the acceleration was driven more by inflation than by real growth. Earnings are a nominal calculation: revenue and profits are measured in current dollars, so higher prices flow through the income statement even when volumes are flat. A company that sells the same quantity of goods at 4% higher prices reports 4% higher revenue with no improvement in real demand.
This distinction is the fulcrum of the whole debate. If earnings growth is being carried by inflation and one-off investment marks, then it is a cyclical phenomenon tied to a specific price environment — and it will not compound at this pace once the comp base normalizes. If, instead, the growth reflects genuine margin expansion and volume gains across most sectors, then it can persist even as rates rise. The evidence points to both forces being present, which is precisely why Dawson's "peak growth" call deserves attention rather than dismissal.
Why Earnings Make Rising Rates Tolerable — For Now
The mechanism behind Dawson's argument is straightforward and correct as far as it goes. Equity returns over any meaningful horizon decompose into three pieces: earnings growth, multiple change, and dividends. When rates rise, the multiple piece turns negative — investors discount future cash flows at a higher rate, so they pay less for each dollar of earnings. The only way the total return stays positive is for earnings growth to outrun multiple compression. That is exactly what happened in the second quarter: 50% earnings growth swamped any de-rating pressure, and the index climbed to a record.
There is also a historical precedent that supports the tolerance thesis. In the mid-2000s, the Fed raised the federal funds rate from 1% to 5.25% over two years while the S&P 500 advanced. In 2016 and 2017, rates rose gradually and equities rallied. The common ingredient in each episode was not benign rates but growing profits. When the denominator of the P/E ratio expands fast enough, the ratio can fall even as the price rises.
For the current cycle, the forward earnings picture still looks supportive. Analysts are projecting 27.4% to 28.2% growth for the third quarter and 25.2% to 25.8% for the fourth. Full-year 2026 estimates cluster around 30% to 31%. If those numbers hold, earnings would grow at a double-digit pace for a third consecutive calendar year — an achievement not seen in two decades, per BlackRock. Against that backdrop, a 10-year yield at 4.73% is uncomfortable but not fatal. The equity risk premium may be thin, but it is not negative as long as nominal earnings keep compounding.
Dawson's practical advice reflects this balance. She suggested waiting for volatility to create better buying opportunities rather than chasing the index at records — a posture that accepts the bullish earnings case while acknowledging that valuations at 20 times forward earnings offer no margin of safety. In her own writing, she has noted that confirmation from the earnings side of the cycle is typically about six months too late relative to prices. By the time the data confirms a peak, the market has usually already turned.
The Second-Order Problem: What Happens After the Peak
Here is the question the market is not asking loudly enough. Everyone understands that earnings are strong. The second-order issue is what happens when earnings growth decelerates at the same time that rates are still rising. The tolerance argument works in one direction: strong profits offset higher discount rates. But the offset is asymmetric. If earnings growth slows from 50% to 30% to 20% while the 10-year yield climbs from 4.7% toward 5%, the multiple has two headwinds at once — a higher discount rate and a lower growth justification for the multiple that remains.
This is the classic late-cycle trap. Investors extrapolate the trailing earnings surge into their forward models, which is why forward estimates for 2027 still assume robust growth. But Dawson's peak-earnings call implies the marginal direction is down, not up. A stock priced for 25% growth that delivers 15% does not simply give back the 10% difference in growth; it often loses multiple as well, because the valuation was underwritten on the higher trajectory. The de-rating compounds the deceleration.
The confirmation lag Dawson flags makes this worse. If earnings data confirms a top roughly six months after prices do, then relying on reported earnings as a risk signal is like driving by looking in the rearview mirror. The S&P 500 at 7,800 is pricing in continued earnings momentum. The risk is not that Q2 was weak — it was spectacular. The risk is that the tape is discounting a profits cycle that has already peaked.
There is also a mechanical point about nominal growth. If the 6.5% nominal GDP print was inflated by prices rather than volumes, then earnings growth in the coming quarters depends on inflation staying elevated. But elevated inflation is exactly what keeps the Fed in a hiking posture and keeps the 10-year yield pinned near 4.7% or higher. So the same force that flattered the earnings number — nominal growth driven by inflation — is the force keeping discount rates hostile. The earnings shield and the rates sword share a single handle.
The Strongest Case Against the Peak Call
The bear case for Dawson's warning is not weak, and it deserves a full hearing. The counter-thesis is that this earnings expansion is broader and more durable than the paper-gain narrative suggests. Excluding the "Magnificent 7," the S&P 500 still grew earnings at roughly 31% in the second quarter. The beat rate of 86% was the highest since 2021 across a wide swath of sectors. Margins at nearly 17% show that companies retain pricing power even with wages elevated and borrowing costs at restrictive levels. If firms can pass costs through and protect margins while the economy grows in nominal terms, then earnings do not need a special catalyst to stay resilient — they simply reflect a healthy, if inflationary, economy.
There is also the point that analysts are still raising estimates, not cutting them. FactSet noted that positive EPS surprises from Alphabet and Amazon drove much of the upward revision in the index's growth rate during the quarter, but revisions from Health Care, Communication Services, and Energy also contributed. When sell-side analysts are chasing actual results higher rather than trimming forecasts, it suggests the consensus is behind the curve in the optimistic direction — which historically means estimates have further to rise before they peak.
This counter-thesis has real force. It correctly identifies that the trailing data is broad and strong, and that margin resilience is evidence of corporate pricing power rather than accounting luck. But it leans heavily on backward-looking evidence to make a forward claim. The question is not whether Q2 was good — it was. The question is whether Q3, Q4, and 2027 can sustain a growth rate that already assumes continued nominal acceleration. The projected deceleration from 50% in Q2 to 28% in Q3 to 26% in Q4 is built into consensus. If Dawson's peak call is right, even those lower numbers may prove too high once the one-off gains drop out of the year-over-year comparison entirely.
The decisive point is the asymmetry of the bet. If earnings keep growing at 25%-plus and rates stabilize, the market grinds higher from here — a good but not explosive outcome, given the 20-times multiple. If earnings growth halves while rates rise, the downside is a genuine de-rating. The upside is capped by valuation; the downside is not capped by anything except a recession that forces the Fed to cut.
What to Watch: The Signals That Settle the Debate
Several concrete data points will determine whether Dawson's peak-earnings call proves right, and whether the market's tolerance for rising rates holds. First, the third-quarter earnings season, beginning in mid-October, will show whether growth decelerates toward the consensus 27%-28% range or surprises to the upside. A print above 30% would materially weaken the peak thesis. Second, the magnitude of the earnings surprise matters as much as the growth rate: if the beat rate falls back toward its 78% five-year average and the surprise magnitude collapses from the record 29.2%, it would signal that analysts have finally caught up to reality.
Third, watch the 10-year Treasury yield around the 4.75% to 5.00% zone. A sustained break above 5% while earnings growth is decelerating would test the tolerance thesis directly, because it would combine multiple compression with a lower growth justification. Fourth, the Federal Reserve's Sept. 15-16 meeting and the August CPI print due Sept. 11 will set the near-term path for rates; a 25-basis-point hike would confirm that policy is still tightening into a slowing profits cycle.
Finally, the most important falsifying signal is a specific combination: if Q3 2026 earnings growth comes in above 30% year over year while the 10-year yield holds below 4.5%, the "peak earnings, rising rates are tolerable only while profits accelerate" thesis is wrong, and the market's current valuation would be justified by fundamentals rather than momentum. Conversely, if growth decelerates below 20% while the 10-year yield remains above 4.7%, the tolerance argument breaks down and a material de-rating becomes the base case.
Bottom Line: Tolerance Has an Expiration Date
Dawson's core insight holds up under scrutiny: earnings strength is what has made rising rates tolerable for equities, and without it, a 4.73% 10-year yield would be doing far more damage to a 20-times market. The qualification is that the tolerance is conditional on the earnings trend continuing, and the trend, by Dawson's own reading, has just peaked.
For investors, the implication splits by time horizon. In the short term, momentum and the still-elevated beat rate can keep the market resilient, and volatility-driven pullbacks may well be buying opportunities as Dawson suggests. Over the medium term, the deceleration from peak growth is the risk — not a collapse in earnings, but a slowdown that leaves the multiple unsupported. Over the long term, the structural question is whether the economy can deliver real, not just nominal, earnings growth with rates structurally higher than the post-2008 norm. The second quarter's numbers do not answer that question; they were flattered by inflation and investment marks that will not repeat.
The scenarios are clear. In the base case, earnings growth decelerates through the second half of 2026 toward the mid-20% range, rates stabilize near current levels, and the market trades in a range as valuation digests slower growth. In the upside case, nominal GDP stays hot, earnings re-accelerate above 30%, and the index pushes higher despite rates. In the downside case, growth decelerates faster than consensus while the Fed keeps hiking, and the 20-times multiple compresses toward its long-run average.
The market is being paid to believe that earnings will keep growing fast enough to outrun the bond market. Dawson's warning is that the fastest growth is already behind us — and that when earnings stop accelerating, the tolerance for rising rates expires with them.
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