Despite soaring oil prices and rising inflation expectations following the US-Israel conflict with Iran, the S&P 500 has shown relative resilience, remaining less than 7% below all-time highs. Analysis reveals that short-term stock returns primarily stem from valuation swings, while long-term gains rely on earnings growth and dividends. Splitting S&P 500 returns over 15 years shows earnings per share (EPS) growth driving the bulk of cumulative returns, though the forward price-to-earnings (P/E) ratio has fallen nearly 9% recently, offsetting higher EPS forecasts. 4.2% higher consensus EPS expectations for the next year contrast sharply with this valuation decline.

Sector analysis shows similar patterns, with expected EPS rising across most industries due to higher oil prices and tech optimism, yet valuations derating broadly. This sector-wide derating, mirrored by rising bond yields, signals investors may be discounting future cash flows more aggressively. The divergence between rising equity earnings expectations and falling equity valuations presents a key market tension point.