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.