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Chart of the week

At new highs, stocks increasingly split from earnings

The S&P 500 has hit a fresh new high. Are stocks ready for a pullback? This week’s chart looks at the split between equities and earnings.

January 22, 2021 | 2 minute read

S&P 500 and 12-month forward earnings per share

Source: Bloomberg Finance, L.P., as of January 20, 2021. EPS refers to earnings per share.

  • Stocks’ remarkable performance from 2020 has continued into this year. After climbing more than 18% last year – and more than 60% off the March low – the S&P 500 has moved another 2.6% higher in the first weeks of January.
  • Stocks touched a new all-time high this week amid positive investor sentiment as companies provided strong forward guidance to kick off Q4 earnings season. Investors also remain hopeful that an accelerated vaccine rollout in the coming months will power a strong economic rebound in the second half of 2021.
  • Amid the positivity, however, it would be fair for investors to ask how much longer the rally can run. These questions seem particularly relevant as stock market activity in recent months has become increasingly divorced from corporate earnings
  • The chart compares the S&P 500’s returns to its 12-month forward earnings per share (EPS) since October 2009.1 The S&P 500 generally tracks earnings, with even a modest decline in EPS projections often leading to a corresponding pullback in the index. In the current environment, however, the stock rebound has far outpaced the earnings recovery.
  • Markets are forward-looking and could well build on their strong start throughout the year. Yet high valuations have become a growing concern for some investors while rising Treasury yields amid a potential economic reflation are another notable potential risk for equity investors.
  • Given this backdrop, the equity market’s new all-time high this week might represent a good time for prudent investors to consider reevaluating the risk in their portfolios.  

  • Bloomberg Finance, L.P., as of January 20, 2021.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

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