Is the stock market expensive? The answer depends on where you look and the lens you’re looking through. Valuations are elevated by historical standards, and investor enthusiasm has played a significant role. That doesn’t mean that there are real fundamental underpinnings to the strong bull market of recent years. Strong revenue and earnings growth has been a powerful catalyst behind the advance, so the better question for investors may be “Can earnings continue to deliver on increasingly lofty expectations?”
While the S&P 500’s forward price-to-earnings ratio remains elevated, it’s actually declined a bit this year (to about 21 today) as earnings growth has outpaced the market advance. Earnings per share for the S&P 500 has increased considerably since 2020 but have surged over the last several quarters — as illustrated by the orange line above. In other words, the positive performance story in recent years hasn’t simply reflected more dollars chasing the same earnings stream. The earnings stream itself has grown.
Whether that growth is durable remains a question. A meaningful portion of recent earnings strength has been tied to an unusually powerful AI-investment cycle. These cycles can persist, but not indefinitely. Even a moderation in the pace of spending — even short of an outright decline — would curtail earnings expectations both the companies that have benefited most from the investment binge and the market broadly.
The combination of massive AI investment, accelerating earnings growth, and a constructive economic backdrop coalesced into a positive first half of the year for investors. For that to continue, companies will need to continue to deliver on increasingly lofty investor expectations for continued earnings growth.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.
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