Investors remain cautious about a market trading near a record high, as seen in the good old-fashioned price-to-earnings (P/E) ratio on the S&P 500 (^GSPC).
Despite a 14% year-to-date return for the S&P 500, the forward P/E multiple on the index has dropped to 19 times from 22 times. It now matches its 10-year average.
“One reason for the decline in valuations is the rise in interest rates,” Goldman Sachs strategist Ben Snider explained. “The S&P 500 equity risk premium has remained near the current 3% level for most of the last two years. The lower P/E also reflects investor concerns that the AI investment boom is causing companies to ‘over-earn’ relative to both cash flows and a sustainable level of profits.”
An argument could easily be made that the P/E ratio should be above its long-term average, given higher oil prices and Treasury yields. That argument revolves around the strength of corporate profits.
Analysts have increased their third quarter earnings projections for S&P 500 companies by 1.3% since June 30, FactSet pointed out. Usually, analysts lower their earnings estimates during the quarter.
Over the past five years (20 quarters), earnings expectations have fallen by 2.2% on average during the quarter. Looking out 10 years (40 quarters), earnings expectations have fallen by 2.5% on average during the quarter.
Analysts are gearing up to see big profit numbers when results begin to trickle in starting in mid-October.
The S&P 500 is expected to report year-over-year earnings growth of 29.1%.
If 29.1% is the actual growth rate for the quarter, it will mark the third consecutive quarter of earnings growth above 25% and the eighth consecutive quarter of double-digit earnings growth for the index, according to FactSet.
All 11 sectors of the S&P 500 are projected to report year-over-year growth.
“Stock valuations have become reasonable again as earnings growth has surged, turning the key debate to the sustainability of fundamental growth into 2027,” Evercore ISI strategist Julian Emanuel said.
Brian Sozzi is Yahoo Finance’s Executive Editor, host of the Sozzi Unleashed morning show, the ‘Power Players With Brian Sozzi’ podcast 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.
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