Where We Were
2025 was another great year for equities, as well as fixed income – despite a cloud of despair present in so many minds around the country. President Trump rode a strong wave of economic hope and goodwill early in the year, mostly focused on dismantling selective government overreach and lowering taxes. That goodwill was quickly dashed against the rocks of see-saw tariff and trade policy changes, retaliation by quite important (and powerful) trade partners, as well as an unwise attack on the Federal Reserve and the members of the FOMC. As a result, confidence as well as economic and earnings growth projections tapered off between the end of Q1 and into Q2. That both coincided with, and likely caused, an overdue equity market correction between March and April.
Market conditions and confidence rose again after Q2 earnings results started to come in, as they did not reflect the doom-and-gloom forecasts of many an economist and talking head. Corporate earnings rode a tailwind of stronger-than-expected incomes, spending and net worth, as well as expanding margins and cash flow led by growth companies. Strong earnings results and forecasts continued throughout the rest of the year. Equity returns were strong across the board and led by foreign emerging markets (+34%), foreign developed markets (+31%), and US large cap growth (again, +22%). The S&P 500 rose +18%. Fixed income returns were extremely even across the board and generally well above their long-term averages, buoyed by tapering inflation and overall US economic growth projections (after inflation) of a bit less than 2%. The Aggregate Bond index rose 7%, while 7-10 year Treasurys, investment-grade corporates, mortgage-backed, and high yield bonds all returned 8+% on the year, proving once again that the Chicken Littles (“60/40 is dead”) should remain unheeded.
Where We Are
Source: Factset
Correction Central. The S&P 500 index was off -6% for the month, was off -10% from its high as of 3/30, but gained back almost 3% on the closing day of the month. It is off -7% from its January high, and is testing levels of support. It could be that 6400 is its new support level, but it will take time to see what’s what. Within the S&P 500, Growth was -8% for the month, while Value was flat at 0%.
The US Aggregate Bond index is up 0.0% YTD. The 10-year T-Note yield is at 4.34%.
Q4 Results. With 100% of S&P 500 constituents reporting, 73% beat revenue estimates, with the average upside surprise being 2%. 74% of companies beat EPS estimates, with the average beat coming in at 6%. Actual Q4 EPS growth is 14% vs. the 7% expected at the beginning of Q4.
S&P 500 earnings expectations. For 2025, final EPS was $270/share, up 13% vs. 2024. The 2026 estimate is $317 (+17%), 2027 is $369, (+16%), and 2028 is $411 (+11%). P/E ratios for ’26-28 are 20x, 17x and 15x. The P/E-to-Growth (PEG) ratios are 1.2, 1.1 and 1.4. The average EPS growth rate over the past 20 years is 7%; the average trailing and forward P/E ratios are 19x and 17x, while the 20-year average trailing PEG ratio is 2.7x. The consensus price target for the SPX is 8340 vs. 8318 a month ago, and 8158 sixty days ago, for an implied return of +28%. If achieved this calendar year, the implied total return for the S&P 500 in 2026 would be 24%.
Where We're Headed
All hail the healthy correction of March. Those previously concerned about extended valuations leading up to February 1 will take comfort from the fact that the trailing and forward P/E multiples of the S&P 500 index have dropped from 28x and 23x to 25x and 19x. Over the past 20 years those have averaged 19x and 17x, but remember those multiples were on EPS growth which averaged 6.8%. The resultant P/E-to-Growth (PEG) ratios are 2.7 and 2.4. On other words, over the past 20 years, the average price investors paid for $1 of earnings growth was $2.70 on a trailing basis and $2.40 on a forward basis.
Compare that with 2025 EPS growth for the S&P 500 which was almost double 13%, as well as the forecast (Factset) of 17% EPS growth this year and 16% in 2027. P/Es on 2025 actual and 2026 and 2027 estimates are 25x, 20x and 17x, for PEG ratios of 1.9, 1.2, and 1.1.
What these figures mean is that compared to the average price paid for each $1 of growth (actually %) over the past two decades (forward P/E), the S&P 500 index currently trades at discounts of -50% and -55% for 2026 and 2027 estimated EPS. And BTW, despite the war with Iran and the short-term effect on oil/gas prices, forward next-twelve-month (NTM) earnings estimates are up from a month ago, to record highs.
Bounce from oversold? Stocks are now quite oversold, and ever “oversolder” than a week ago – despite the rally on news that President Trump may end the war even though the Strait of Hormuz isn’t fully back in business. A weekly oversold condition (bottom chart) is more significant given its 70-trading-day equivalent.
Daily – 1 Year (Source: StockCharts)
Weekly – 5 Year (Source: StockCharts)
We encourage you not to fight the last war. This applies broadly to life in general, but currently the maxim relates to COVID, earnings growth/valuation and the economic impact of oil price fluctuations. With regard to COVID, there are many folks still dealing with core trauma memories of that time, skewing their perception of the resiliency of the U.S. economy and the power of profit-motivated companies in a Representative Republic.
Related to this is the gradual shift in sector weightings over many years, as discussed last month, which has meant higher weightings for faster growing companies. For valuation, many (even professional) investors still believe that the S&P 500’s average trailing P/E is 15x, though in truth it is 27% higher at 19x. What once was “too expensive” may not be today. See the previous sector above for more.
And finally, with regard to oil’s impact: like the U.S. economy’s impact from the manufacturing vs. services sectors, oil/gas price increases have gradually become less impactful relative to past price shocks, as well as relative to overall household spending. Some of this is surely due to at-home work and electric vehicles. But it is also a result of more efficient cars and trucks on the road. Average MPG is 22% higher than it was 30 years ago.
Today’s Wall Street Journal has an excellent perspective piece on gas prices relative to other metrics, and it is enlightening. In addition to current, average, inflation-adjusted gas prices being significantly lower than they were 10 and 20 years ago, the percentage of personal income spent on gas is only about 1.5%, about half of what it was through most of the financial crisis and about a third of what is was 45 years ago during the double recession/inflation/interest rate spike of 1980-82. That was real inflation folks. 1980 was the year our family moved to Portland, and my parents’ mortgage rate was 18%.
In a nutshell and as always, we’re optimistic about the future and the ability of U.S. companies and its economy to work through short-term disruptions. Most folks have to go to work every day to provide for today as well as tomorrow. Over time, stock prices reflect underlying revenue and earnings of the companies they represent, and we believe there is more upside opportunity for the next 20+ years than we’re witnessed in the past 20+ years. In some areas, perhaps more than we’ve seen in our lifetimes. And by all means let’s continue to employ our critical thinking skills. But while we do so, let’s remember that a bet against the invisible hand of economics and American ingenuity has been a poor one.
“Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett
“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” – Benjamin Graham “As a dog returns to his vomit, so a fool returns to his folly.” – Solomon
“Stay thirsty, my friends.” – The Most Interesting Man in the World
Source: Factset