Market Valuations: A Surprising Story

Imagine where the stock market would be this year if price-to-earnings (P/E) ratios were expanding too. The answer lies in a quick glance at the S&P 500’s forward P/E ratio. It’s now below where it started in 2026, according to Truist chief market strategist Keith Lerner. The reason behind this phenomenon is the significant growth in corporate earnings. The S&P 500 has been tracking toward back-to-back quarters of above 20% earnings growth, with companies hauling in near-record profits.

As a result, the ‘E’ in the P/E ratio equation has risen substantially, pulling down the overall valuation multiple for the S&P 500, even as stock prices remain historically high. This situation is a stark contrast to the enthusiasm of investors for owning stocks this year, with only one 5% or more pullback.

Corporate Earnings Growth: A Bright Spot

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.

What’s next? ‘We are in an earnings boom, with estimates rising across large, mid, small caps, and emerging markets,’ Lerner said. The bottom line is that 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.

The Stage is Set for a One-Two Punch

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. The current market situation presents an interesting paradox, where investor enthusiasm for owning stocks is not yet matched by the broader market’s valuation. However, with corporate earnings growth showing no signs of slowing down, it’s likely that the market will continue to defy expectations and push higher.

Investors should take note of this unexpected development, as it could have significant implications for their investment strategies. The current market dynamics suggest that stocks could continue to rise, driven by the strong earnings growth and the resulting compression of P/E ratios. As always, it’s essential to stay informed and adapt to the changing market conditions to make the most of this opportunity.

Key Statistics:

• Estimated year-over-year earnings growth rate for the second quarter: 23.3%
• Five-year average earnings growth rate: 16.4%
• 10-year average earnings growth rate: 10.3%
• Number of sectors expected to report year-over-year earnings growth: 10 out of 11