Investing.com -- The S&P 500 broke above 7,600 for the first time this week, prompting Capital Economics to examine whether the index's AI-driven surge since the end of 2022 has been powered by earnings growth or by investors simply paying more for those earnings. The answer, the firm said, depends entirely on how you measure it.

Chief Economic Adviser John Higgins told investors that the two most common valuation frameworks produce starkly different conclusions.

Using forward twelve-month earnings per share, the rally looks fundamentally driven. Under that approach, EPS growth has contributed significantly more than multiple expansion to the index's advance since end-2022, suggesting gains have been rooted in improving corporate profitability.

But applying a cyclically adjusted lens is said to tell the opposite story. Breaking down the real, inflation-adjusted increase in the index into its component parts using Shiller's widely cited CAPE ratio, Capital Economics found that speculation has been the dominant driver.

"Gains in the S&P 500 since the end of 2022 have been fuelled far more by 'speculation,'" Higgins wrote.

Higgins explained that the divergence comes down to how earnings are measured.

He noted that forward EPS have risen sharply in recent years, suppressing the price-to-forward-earnings ratio. Real trailing earnings, by contrast, have grown more slowly, leaving the CAPE, which has climbed nearly 13 points since end-2022 versus roughly 4 points for the forward multiple, at elevated levels.

"Has the S&P 500's surge been fundamental or speculative? It depends," Higgins concluded.