Stocks are rallying despite the Iran war and stubborn inflation. Here's why.

The S&P 500 is on a hot streak, notching nine record highs in May alone despite soaring gasoline prices, sliding consumer confidence and the highest inflation in almost three years.

The rally in stocks also has more room to run, according to Wall Street analysts. On Wednesday, Goldman Sachs upped its target for the S&P 500, projecting that the broad-based index could reach 8,000 points by year-end, or about 6% higher than its current level.

So why is Wall Street increasingly upbeat even as many Americans remain gloomy about the economy? Investors are focused on artificial intelligence's potential to boost productivity and on robust first-quarter corporate profits, LPL Financial chief equity strategist Jeff Buchbinder told CBS News.

"I've been doing this for 25 years, and I've never seen anything like this — it's really amazing how big these earnings numbers are," Buchbinder said.

Here are three reasons why the stock market is soaring.

Technology companies grew earnings by 50% on average in the three months of the year, far stronger than the 10% growth they typically see in the period, Buchbinder said.

Excluding tech companies, U.S. corporations boosted their earnings growth by 20% in the first quarter, or double the typical rate. Businesses are benefiting from lower tax rates and other breaks enacted last year under the Republicans' "big, beautiful" tax and spending bill, Buchbinder said.

Above trend profit growth has had an unusual impact on the valuation of the S&P 500, he noted. Investors typically analyze price-to-earnings ratios — a stock or index's price divided by its expected future per-share earnings — to determine whether shares are overvalued or undervalued.

But despite the record-setting S&P 500, the index's P/E ratio has fallen as earnings have increased faster than the market, Goldman Sachs analysts said in their research note.

"Year to date, the S&P 500 has risen by 10%, forward [earnings per share] estimates have risen by 15%,and the P/E multiple has declined by 4%," Goldman's analysts said, adding that the current P/E multiple stands at 21, down from 23 at the end of 2025.

That dynamic is making stocks look more affordable and attractive to investors, Buchbinder said.

"Earnings are just going gangbusters here," he added. "This caught the market by surprise."

Investors are also cheered by the spread of AI, including its promise to boost corporate productivity.

"Investors are betting AI transforms the global economy," deVere Group CEO Nigel Green said in an email.

To be sure, there are questions about whether the run-up in AI-related stocks reflects a bubble, with some critics comparing it to the ill-fated dot-com boom of the late 1990s. Yet unlike that earlier era, many of the companies leading on AI are already giants, such as Microsoft and Google, while newer entrants such as Claude developer Anthropic are showing strong revenue growth.

Most investors are also looking past the current economic headwinds, betting that the Iran war is drawing to an end, Buchbinder said. That would allow oil tankers to again start passing through the Strait of Hormuz, easing global oil prices and inflationary pressures.

"Clearly, if the U.S. and Iran can agree on any preliminary deal in the coming days, the price of oil will fall further, bond yields ease back and stocks make gains," said Tom Holland of Gavekal Research in a May 26 report.

He added, "And if ships do begin to pass through Hormuz in greater numbers in the weeks following any early deal, these market moves are likely to gather pace as investors further price out the risk of an inflationary bust."

The view that a deal is imminent may be "dangerously rose-tinted," Holland cautioned.

But a U.S.-Iran deal to end the conflict would further fuel the ongoing rally, Buchbinder said.

"If you're in a market environment where you have potentially falling interest rates, lower oil prices, no recession and above-average earnings growth, that is the recipe for above-average stock market gains," he said.

Various risks could derail the rosy market forecasts, ranging from the Iran war dragging on, which would likely push energy prices higher, to AI companies failing to deliver on investors' lofty earnings expectations.

Investors are also nervously watching if persistent inflation keeps the Federal Reserve from cutting interest rates anytime soon, a fear reflected in a recent rise in Treasury yields.

"Higher bond yields and sticky inflation are growing concerns that may cap upside if these conditions persist," Anthony Saglimbene, Ameriprise chief market strategist, said in a May 26 research note. "In our view, the direction of the market's travel from here could hinge on whether rates stabilize and whether incoming economic data confirms that growth can hold without reigniting inflation."