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
Earnings Keep Crackin’ The Whip. The S&P 500 index was up 5.3% for the month, now up 11% YTD, and at another all-time high of 7580, driven by more than 2x the expected EPS growth rate in Q1. Within the S&P 500, Growth was up 8% for the month, while Value was up 2%.
The US Aggregate Bond index is up 0.5% YTD. The 10-year T-Note yield is at 4.44%.
Q1 Results. With 97% of S&P 500 constituents reporting, 81% beat revenue estimates, with the average upside surprise being 2%. 85% beat EPS estimates, with the average beat coming in at 17%. Actual Q1 EPS growth is 29% vs. the 13% expected at the beginning of Q1.
S&P 500 earnings expectations. For 2025, final EPS was $270/share, up 13% vs. 2024. The 2026 estimate is $334 (+24%), 2027 is $386, (+15%), and 2028 is $433 (+12%). P/E ratios for ’26-28 are 23x, 20x and 17x. The P/E-to-Growth (PEG) ratios are 0.96, 1.3 and 1.4. The average EPS growth rate over the past 20 years is 7.5%; the average trailing and forward P/E ratios are 20x and 17x, while the 20-year average trailing PEG ratio is 2.6x. The consensus median price target for the SPX is 8721 vs. 8390 a month ago and 8340 sixty days ago, for an implied return of +15%. If achieved this calendar year, the implied total return for the S&P 500 in 2026 would be 26%.
Where We're Headed
Fresh all-time highs to match accelerated earnings growth. Q1 earnings season is virtually over (97% or 487/503 companies have reported). Estimated year-over-year growth estimated by analyst consensus (Factset) before the quarter began was 12.5%. Actual growth reported? 28.6%. And that’s not just from Information Technology, folks (54% vs. 34%). Expected vs. actual EPS growth was significantly higher as well for Communication Services (49% vs. -3%), Consumer Discretionary (41% vs. 7%), and Financials (21% vs. 14%), Materials (42% vs. 28%), and Utilities (16% vs. 10%), which along with IT comprise 75% of the market value of the S&P 500 index. And while IT does impact overall market-cap-weighted price and earnings data more than any other sector (as it has starting 20 years ago), earnings outperformance has been much broader than many would have you believe.
Alongside new highs come renewed concerns about valuation. We certainly do believe that we are in new territory - not so much with regard to cycles of fear/greed and undervaluation/overvaluation, but with regard to an awareness of why stock prices and valuations have been so robust, and why many market observers still find some room to be positive. This month we crunched the numbers and looked back through the sands of time again, looking for metrics both understandable and relevant. What we came up with is summarized below. What you see is a table of fundamental and valuation stats for the S&P 500 index, covering the 20 years from 2006 to 2025. Of utmost importance for the valuation discussion are comparable growth rates for cash flow and earnings-per-share (EPS), as well as the ratio of prices paid for those earnings (P/E), and the ratio of those P/Es relative to the growth in EPS. Both the nominal and relative are important here. On a nominal basis, for example, operating EPS growth for the S&P 500 index averaged 7.5% per year over the preceding 20 years ending in 2025. The average P/E paid for EPS during that time period was 19.8x on a trailing basis (past 12 months), and 17.2x on a forward basis (coming 12 month estimate). The ratio of P/E to Growth (of EPS) was 2.6 on a trailing basis and 2.3 on a forward basis. In other words, and in a manner of speaking, investors paid $2.60 for each $1 of earnings growth when looking at the past, and $2.30 when looking to the future. Compare those to expected growth, prices paid (P/E) and relative prices paid (PEG) for the upcoming 2026-2028 period: 61% higher cash flow growth, 93% higher EPS growth, 17% and 19% higher P/Es, and -40% and -38% lower PEGs. Again, in other words, despite higher nominal P/Es, investors are paying approximately -40% LESS for earnings growth over the coming three years than they did, on average, over the past twenty.
There are certainly other takeaways from the metrics which make contrasts between the past and estimated future meaningful. Remembering that 20 years ago IT comprised just 15% of the S&P 500 index weight, and today it comprises 37%, a larger share of faster-growth companies which pay low or no dividends means that all else being equal, both the dividend yield of the index and its dividend payout ratio will be lower over time. In addition, faster-growing companies with large addressable markets tend to have higher profit margins than those in more mature industries, and those companies tend to get rewarded for higher margins and bottom-line growth with higher valuations (higher P/Es). For example, while the S&P 500 index overall is expected to generate a pre-tax margin of 20% this year, the Consumer Staples sector is expected to produce a margin of 9%. The Health Care sector? 10%. Energy? 15%. Industrials? 15%. How about Info Tech (IT)? 36%. Oh, and by the way, current estimates anticipate that that sector’s pre-tax margin will expand by +300bp between this year and the end of 2028 to 39% – compared to 26% at the 2019, pre-COVID peak.
And what of the Tech sector’s anticipated earnings growth in the coming 18 months? That outlook has continued to improve. The consensus estimate (Factset) for sector EPS of $6.78 (+69% vs. 2025) has increased 39% over the past 12 months. For 2027’s $8.61 (+27% vs. 2026), it has risen 62%. There have been significant increases in quarterly EPS expectations as well, as you can see below.
Source: Factset
All of that is to say this: be informed about what valuation metrics matter, and why conditions may differ from the zeitgeist narrative. Overall economic conditions are generally positive, and conditions are even more so for certain sub-sectors of many companies. Future expectations and valuations need to be evaluated, “apples-to-apples”, against nominal, trailing and past valuations. That means diving deeper into the understanding and application of market history than just looking at the trailing P/E – which is what most news sources focus and report on. Make sure you are informed so that you can in turn inform, educate, comfort and lead.
Also consider reviewing the Econ/Market slide deck which accompanies this monthly missive. We believe you’ll find that perspective lay within.
Source: Factset
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.