Where We Are
Source: Factset
The S&P 500 was off slightly in October. The S&P 500 index decline -0.9% last month, still consolidating a bit following a 23% gain between April and August. Global stock indexes lagged US Large Cap again, and lag YTD. Mid and Small Cap both rose for the month. Within the S&P 500, Growth was -5% for the month, while Value was up 5%. Rotation continued.
The US Aggregate Bond index is off -0.6% YTD, still reflecting inflation pressures, though yields have fallen from their recent highs. The 10-year T-Note yield is at 4.91%, down -40bp since October 7.
Q3 Results. With 60% of S&P 500 constituents reporting, 71% beat revenue estimates, with the average upside surprise being 2%. 82% beat EPS estimates, with the average beat coming in at 2%. Actual Q3 EPS growth so far was 30% vs. the 26% expected at the beginning of the quarter.
S&P 500 earnings expectations. For 2025, final EPS was $270/share, up 13% vs. 2024. The 2026 estimate is $362 (+34%), 2027 is $421 (+16%), and 2028 is $494 (+17%). P/E ratios for ’26-28 are 21x, 18x and 15x. The P/E-to-Growth (PEG) ratios are 0.6, 1.1 and 0.9. 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 price target is 9315 vs. 9302 a month ago and 9230 sixty days ago, for an implied price return of +23%. If achieved this calendar year, the implied total return for the S&P 500 in 2026 would be 35%.
Where We’re Headed
Past market performance following mid-terms suggests folks should slow their roll. Since 1942, the S&P 500 index has risen in the six months following mid-term elections 21 out of 21 periods. That’s almost 100% of the time! The average total return 180 after mid-terms has been 17%. We believe much of that consistency was due to the fact that control within Congress (House and Senate combined) changed only 7 times, but more importantly only twice did that control change align with the party of the Executive Branch. And by the way, those two periods were 1948 and 1952.
In our view, the movement of the index over time is much more influenced by major geopolitical events, earnings growth and sentiment – the greatest of these being earnings growth.
Domestic stocks have absorbed the upward influence of oil prices quite well so far this year, and although they are performing well, there has been a rotation afoot which few retail folks seem to have noticed. Many are not aware that over the past month Value has outperformed Growth by a full 10% (+5% vs. -5%), and the dividend payers within the S&P 500 have outperformed the overall index by 10%, and Growth by 16%. We believe most folks on the street still view the Mag 7 as the leadership group, and perhaps that Growth/AI leaders between April and August remain on a tear.
In fact, the opposite is true: the iShares Semiconductor Index has fallen by -17% over the past month, adding to an -11% decline in Q3. In other words, semi market leaders in the summer months have become laggards, correcting close to -30%.
The primary takeaways are two-fold: first, about the time nobody wants consistent dividend leaders, they are likely poised to come back into favor. Second, unless the productivity and profitability gains afforded by technology are devolving and will contribute less to growth and equity indexes in the future, some folks might consider the recent pullback in tech leaders to be a possible indicator of significant relative value.