by Justin J. Long CFP® on Sep 3, 2025 7:33:25 AM
Where We Were
2024 followed through on gains in 2023, driven higher by gradual declines in inflation expectations and gradual increases in employment, consumer spending, corporate earnings, and economic growth. Like 2023, 2024 began with Value, SMID and Foreign markets taking the lead, but overcome once again by US Large Cap Growth.
Revenue and earnings growth in the Growth sectors drove performance again, while investors tried to absorb the fundamental realities of lower asset/higher margin within the Information Technology and Communication Services sectors, lamenting higher P/E ratios all year – while equities climbed even higher. Global equity benchmarks rose between 4% and 25% for the year, with the S&P 500 index taking the pole position once more. Developed Foreign equities gained 4%, Emerging markets 7%. Fixed income benchmarks struggled to stay above water last year, except higher risk, higher yielding benchmarks here at home, and foreign government bonds abroad – which were less constrained by inflation concerns. The US Aggregate Bond index gained just 1% last year, equal to investment grade corporate, mortgage-backed, and national muni bonds. High yield bonds carried the year with a gain of 8%, followed by the international aggregate index, up 5%.
Where We Are
Source: Factset
Higher equity values reflecting earnings growth and decent economic data. August provided another all- time high for the S&P 500 index, reaching 6460, up from 6339 at the end of July. The index is now up 11% for the year, with Growth up 13% and Value up 8%. The index is up 34% from the intraday low on April 7. The Nasdaq 100 has rebounded 42% from the same day's intraday low, and is also at an all-time high. Tariff fears have not come to fruition as many feared in March-April, especially with regard to overall earnings growth and index leadership companies.
The US Aggregate Bond index is up 5% YTD (60/40 is up 8.6%). The 10-year T-Note yield is at 4.2%.
Q2 Results. With 98% of S&P 500 constituents reporting, 81% exceeded revenue estimates, with 6.5% y/y growth vs. the 4.75% forecast at the beginning of Q2. 80% of companies have beaten EPS estimates, with average growth of 12% vs. the 9% expected.
S&P 500 earnings expectations. For 2024, actual EPS was $240/share, up 12% vs. 2023. The 2025 estimate is $267 (+11%), vs. $263 a month ago. The 2026 estimate is $302 vs. $300 (+13%), with 2027 at $341 vs. $337 (+13%). Estimates for all three years are higher than they were before Q2 earnings season.
P/E ratios for those estimates are 24x, 21x, and 19x. The P/E-to-Growth (PEG) ratios are 2.4, 1.5 and 1.5. The average EPS growth rate over the past 25 years is 11%; the average P/E and PEG ratios are 21x and 1.9. The consensus price target for the SPX is 7244 vs. 6973 a month ago and 6688 sixty days ago, for an implied total return of +12% from its current level. If achieved during this calendar year, the implied total return for the S&P 500 index in 2025 would be +23%.
Where We’re Headed
All eyes on the FOMC meeting September 16-17. August was a relatively quiet month, apart from better-than- expected earnings results (again), more tariff/Putin chatter, and speculation regarding Fed changes and its rate decision later this month.
As you’ll see again in this month’s economic/market slide deck, there is ample support for a Fed Funds rate cut from the FOMC. In particular, job growth has slowed alongside expectations for a lower increase in consumer spending (+1.9% this year vs. +2.6% in February). PPI and CPI have both come in below long-term averages, and CPI is now under the 30-year average of 3.0% - though still below the Fed’s “target” of 2.0%. The bond market has shrugged off the 2% target and pushed bond prices up YTD, given that everyone knows Fed Funds ain’t gonna stay at 4.5% (upper limit) when inflation is running at 2.9%. Tariff uncertainty was a good enough reason for the Fed to keep rates too high for too long, as usual, but that window is closing rapidly. Every major sector of the bond market is up over 5% YTD except for national munis, reflecting the expectation of a change in the tide.
Meanwhile equities keep establishing new highs. There are always village idiots keeping client monies underinvested during times of consistent upward revisions in revenue, margin, cash flow and EPS estimates, but again that has proved detrimental. And those folks are typically emotionally fragile and swayed by social media and politics, rather than by the underpinnings of past market history and current fundamentals. The Spring consolidation was another fine example of why fear-driven investment advice is foolhardy and a disservice to clients’ long term financial goals. Large cap US stock indexes have rebounded between 30-40% since then (Mag 7 up 50%), alongside more upticks in forward earnings expectations. As you read below, estimates for 2025, 2026 and 2027 are all up again following Q2 earnings season, and the S&P 500 is expected to enjoy the tailwind of at least three more consecutive years of >10% compounded earnings growth – which hasn’t occurred in over two decades (2003-2005). And on a quarterly basis, S&P 500 earnings are expected to grow by 29% between now (Q2) and the end of next year (18 months).
In addition to stronger earnings growth for equities against the prospect of lower capital costs, imagine what the bond market might look like with inflation between 2.5-3.0%, and Fed Funds at 3.5% heading toward 3.0%. That is what current consensus calls for by the end of 2026 (again, see slide deck). Also remember that markets have tended to like policy stability and a dovish Fed, so even when we see a lower-than-expected economic report, the “bad news is good news” cycle may again be in the offing.
Sources: Morningstar, Factset. Performance data represents past performance and is no guarantee of future results. This material has been compiled from sources deemed reliable; it is not guaranteed as to its accuracy and does not purport to be complete. All information contained herein is subject to change without notice. The information is not intended to be used as the basis of investment decisions. Intended for adviser use only.
