The Big Picture
Last Updated: 07-Aug-26 15:36 ET | Archive
Record highs, lower valuations
Briefing.com Summary:
*Record highs don't necessarily mean higher valuations; earnings growth has outpaced price appreciation, compressing forward P/E multiples.
*Rising earnings estimates have been the market's primary support, reinforcing investor confidence despite macro uncertainty.
*Broadening earnings strength has fueled broader market participation, lifting small-cap stocks and the equal-weighted S&P 500.
You might have heard that a lot of things are costing more these days. The stock market isn't one of those things.
Some might find that hard to believe given that the stock market has risen to new record highs. The price level, though, isn't the determinant for value; earnings are.
The stock market can go up in price but down in its valuation if earnings are rising faster than prices. And that is exactly what has happened. Both the market cap-weighted S&P 500 and the equal-weighted S&P 500 are less expensive today than when the year began.
Following the Estimates
On a year-to-date basis, the market cap-weighted S&P 500 is up 13.3%. The forward 12-month EPS estimate is up 24.5% to $383.98. That translates into a forward 12-month P/E multiple of 20.1x compared to 22.2x at the start of the year. That is a slight premium to the 10-year average of 19.0x.
The market isn't cheap by historical standards, but it is cheaper than it was at the start of the year. That helps explain why investors have remained willing buyers despite record highs. As long as earnings estimates continue to trend higher and interest rates don't disrupt the picture, that support should remain intact.
The steady climb in forward earnings estimates has been the market's quiet story all year. While headlines have focused on tariffs, inflation, Fed policy, and geopolitical risks, the market has consistently looked through those concerns because none has materially altered the market's confidence in the earnings outlook.
Market sentiment has gotten rattled at times, but the enduring earnings strength has been the stabilizing factor.
The earnings picture has also broadened, helping to broaden the market's leadership. Buying interest is no longer confined to the mega-cap stocks, reflecting the fact that earnings strength is no longer confined to them. In fact, the small-cap stocks have handily outperformed the mega-cap stocks, evidenced by the 22.3% year-to-date gain for the Russell 2000 versus the 9.9% gain for the Vanguard Morningstar Mega-Cap ETF (MGK).
In turn, the equal-weighted S&P 500 has outperformed the market cap-weighted S&P 500, gaining 14.9% year-to-date. Its forward 12-month P/E multiple has slipped to 16.4x, versus 16.7x when the year began, with the forward 12-month EPS estimate increasing 16.7% to $541.60, according to FactSet.
Briefing.com Analyst Insight
Investors often equate record highs with overvaluation, but those aren't synonymous. Record prices accompanied by record earnings are a much different proposition than record prices driven solely by expanding valuations.
Today's market still carries risks, but the earnings backdrop suggests those risks are being balanced by stronger fundamentals. In that sense, the market's message has been remarkably consistent all year: prices are higher, but valuations are lower.
