The Bottom Line
- The S&P 500 has risen some 320% since the dark days of March 2009 – though hardly in a straight line. Nevertheless, that’s an 18.0% annualized return over a nine-year timespan,1 exceptional by almost any standard.
- That performance has proved the old stock-market adage that stocks climb a wall of worry – there’s certainly been plenty of worry – and plenty of climb.
- Worry aside, the market has drawn strength from a solid pillar of support: corporate earnings.
- In this most recent earnings season, with 327 of the 499 companies in the S&P 500 reporting so far, 256 have surprised to the upside – over 78%.2
- While it’s certainly the case that earnings expectations evolve over the course of the year, this “beat” suggests that for the most part, the largest publicly-traded companies are finding continuing opportunities to improve their businesses.
- Expectations of their continuing success (among other factors) appears to underpin the valuations in today’s equity market, where stock prices indicate that investors are now willing to pay over 20 times June 2017 earnings.
- But faith in that growth is also what’s driving expectations for earnings a little over a year from now.
- That’s reflected in the current value of forward P/E, which at 17.8 times earnings is clearly more supporting, being below the average for the past 15 years.
- And that valuation is a more solid reason for strong performance than the belief in the power of worry.
1Source: Bloomberg, S&P500 total return, Feb 27, 2009 to October 31, 2017, all figures on a total return basis.
2 Source: Bloomberg, as of Nov 1, 2017