The Bottom Line
- 99% of S&P 500 companies have reported earnings for 2Q 2017—and to say the news was good would be an understatement.1
- Operating earnings for the 12 months ended June 30, 2017 were 18.1% higher than the end of June 2016, the best showing since a 19.8% gain almost six years ago.
- This certainly helps explain the continued strength in equity prices—and why fears of increased volatility have not yet come to pass.
- But while major stock indexes have seen double-digit gains this year, prospects for future appreciation will hinge heavily on further earnings growth.
- Present expectations are encouraging—S&P 500 operating earnings are forecast to grow to $127.14 in 4Q17 and to $144.88 by the end of 2018—impressive gains of 9.7% and 25% respectively.
- What does that mean for valuations? Based on an index level of 2,488.11 (the closing price on 9/11/17), the forward price/earnings (P/E) ratio of the S&P 500 was 19.57x for 4Q17 and 17.17x for 4Q18. Those valuation levels are somewhat elevated by historical standards, but as always P/Es can vary greatly among the hundreds of companies that make up the index.
- Some of these stocks could be overpriced and some underpriced—both situations representing opportunities for investors that take a selective approach rather than a broad-based index approach.
- That’s the expertise of active US equity managers like ClearBridge and Royce -- who dive deep into company fundamentals to identify potential pricing distortions that make it possible to capture unrealized value, and sidestep stocks that are too steeply priced.
1 Source for all data is S&P Dow Jones and Bloomberg.