Bank of America wants investors who are looking at the stock market through a political lens to ‘follow the profits’.
In an analysis stretching back to 1936, the bank found a bigger divide between winning S&P 500 years based on earnings growth than on which party held the White House.
Political headlines offer plenty of reasons to feel bullish or bearish. Tariffs, taxes, and spending decisions can change the outlook for businesses, making Washington difficult for investors to ignore.
But the party in power tells only part of the story.
BofA’s comparison refocuses on what companies earn, a less dramatic subject that can get buried beneath the daily political noise.
For investors deciding what deserves their attention, the findings offer an excellent starting point.
BofA’s 68% finding puts earnings at the center of the market debate
Bank of America’s argument comes down to a striking gap.
According to the bank, earnings effectively separate winning stock market years much more sharply than political affiliation does.
As reported by Seeking Alpha, going back to 1936, BofA found that 68% of positive S&P 500 years coincided with rising earnings per share, while 32% coincided with falling earnings per share. The political split was considerably narrower: 54% under Democrats and 46% under Republicans.
That gives the earnings comparison a 36-percentage-point spread, versus eight points for party affiliation. However, these are shares of winning years, not the probability that stocks will rise under either condition.
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That said, the stock market enters this debate with substantial gains. Through September 25, the S&P 500 was up 13.12% this year, 5.25% over three months, and 17.47% over six months, according to Yahoo Finance data. Its rebound from March’s low left it less than 1% below August’s high.
Next comes the Nov. 3, 2026, midterm election.
Historically, that calendar has challenged investors. From 1945 through 2025, midterm years averaged S&P 500 price gains of 3.8%, versus 10.9% in other years, according to J.P. Morgan Wealth Management. Yet fourth quarters averaged a 6.4% gain.
This year has already outpaced that full-year midterm average.
BofA’s takeaway puts the next test squarely on corporate results, in that whether profits can support further gains as investors weigh what the election could mean for taxes, spending, and business costs.
S&P 500 earnings crushed forecasts, but the gains need unpacking
Corporate earnings give BofA’s argument strong backing.
By Aug. 28, FactSet’s Q2 earnings growth tally stood at 52%. Some 86% of S&P 500 companies beat profit expectations, with aggregate earnings exceeding estimates by 26.5%.
AI and cloud demand helped drive technology’s strength. However, investment gains at Alphabet (GOOGL) and Amazon (AMZN) inflated headline profits, making the surge look stronger than operating performance alone would suggest.
Still, the strength extended beyond those giants.
Companies outside the Magnificent Seven posted blended earnings growth of 31.8%, their strongest showing since late 2021. That breadth gives the earnings story a lot more substance.
Q3 is mostly an expectations story so far. As of Sept. 25, analysts projected 29.1% earnings growth, up from 26.7% on June 30. Seven of the first nine reporting companies had beaten EPS estimates.
The drivers are revealing.
Energy earnings estimates rose 18% as oil climbed, while technology estimates increased 4.1%, led by AI giant Nvidia. Higher energy profits, however, can coexist with greater pressure on consumers.
Meanwhile, 72 companies issued above-consensus EPS guidance, versus 44 below consensus. The positive share, 62%, comfortably exceeded its five-year average of 41%.
Bank of America finds earnings matter more than politics for stock gains.Michael M. Santiago / Getty Images
Investors should buy earnings durability, not just earnings beats
BofA’s findings favor keeping investment decisions linked to profits. But the price paid for those profits still determines how much room investors have for disappointment.
As of Sept. 25, the S&P 500 traded at 19.2 times forward earnings, below its five-year average of 19.8 but above its ten-year average of 19.0. That suggests a reasonable valuation relative to recent history, but it’s far from being an obvious bargain.
The catch is that forward valuations depend on forecasts holding up. For example, a 10% reduction in expected earnings would push that multiple to roughly 21.3 with unchanged stock prices.
For diversified investors, this supports maintaining core exposure while spreading new purchases over time. Rebalancing oversized tech positions can also reduce dependence on a handful of earnings reports.
When selecting individual stocks, prioritize operating income, cash generation, and management’s guidance. Alphabet and Amazon’s investment gains show why headline EPS alone can exaggerate underlying momentum.
Q3’s projected 29.1% earnings growth sets a demanding benchmark. Paying a premium makes more sense when recurring revenue and cash flow support it.
Use earnings season to test those assumptions.
Consider adding after price declines when business prospects remain intact, and reassess holdings when guidance weakens enough to undermine the valuation.
Related: Jim Cramer warns stock market investors who have big gains