Imagine where the stock market would be this year if price-to-earnings (P/E) ratios were expanding too.
The quick insight: Despite investor enthusiasm for owning stocks this year and there being only one 5% or more pullback, valuation in the broader market hasn’t kept pace.
The S&P 500’s forward P/E ratio is now below where it started in 2026, Truist chief market strategist Keith Lerner pointed out (see chart below).
The reason: The P/E ratio is a simple fraction, with the “P” being the price of a stock or market and the “E” representing earnings. When the denominator grows faster than the numerator, the multiple compresses.
This year, corporate earnings have been quite strong, with the S&P 500 tracking toward back-to-back quarters of above 20% earnings growth. With companies hauling in near-record profits, the “E” has risen significantly, pulling down the overall valuation multiple for the S&P 500 even as stock prices remain historically high.
What’s next: “We are in an earnings boom, with estimates rising across large, mid, small caps, and emerging markets,” Lerner said.
The estimated year-over-year earnings growth rate for the second quarter is 23.3%, which is above the five-year average of 16.4% and the 10-year average of 10.3%, according to data from FactSet. If 23.3% is the actual growth rate for the quarter, it will mark the second consecutive quarter of year-over-year earnings growth above 20% and the seventh consecutive quarter of double-digit growth for the index.
Ten of the 11 sectors in the S&P 500 are expected to report year-over-year earnings growth, led by the Energy, Information Technology, and Materials sectors.
The bottom line: If the S&P 500 delivers above its expected 23.3% earnings growth for the second quarter, it could help support the “P” part of the P/E ratio equation as analysts race to mark up estimates further. That could set the stage in the third quarter for a one-two punch of rising stock prices and rising earnings, which the bulls would gladly welcome.
Brian Sozzi is Yahoo Finance’s Executive Editor and a member of Yahoo Finance’s editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.
Click here for in-depth analysis of the latest stock market news and events moving stock prices
Read the latest financial and business news from Yahoo Finance
