S&P 500 nears record as earnings forecasts outpace prices

The S&P 500 closed Monday at 7,764.70, less than 0.5% below its mid-August record of 7,798.99. Yet the index has not reached that level simply because investors have bid up share prices. According to reporting from The Motley Fool, forecasts for company profits have risen much faster than the market itself.

FactSet’s weekly earnings report dated September 18 showed that expected earnings for S&P 500 companies over the coming 12 months had increased 8.8% since June 30. Over the same period, the index had risen only 1.8% based on the report’s data.

That difference has reduced the index’s forward price-to-earnings ratio, which compares its value with forecast earnings over the next year. Investors buying at the end of June paid about 20.4 times expected earnings. By the time of FactSet’s report, the multiple had fallen to 19.1. After Monday’s 1.5% advance, it was around 19.4.

Profit forecasts are driving the market

The lower forward valuation is notable because analysts have been raising their expectations rather than trimming them as the reporting season approaches. FactSet puts anticipated third-quarter earnings growth at 28.9%, up from 26.7% on June 30. If that projection is met, it would represent the third consecutive quarter in which S&P 500 earnings increased by more than 25% from a year earlier.

Estimates for earnings per share also rose 1.2% between June 30 and August 31. Over the past five years, analysts have typically reduced their estimates by 1.7% during those two months. The latest increase therefore marks a sharp departure from the usual pattern and follows another quarter in which forecasts were raised.

Sales are providing support as well. Revenue across the index is expected to rise 11.9% year over year in the third quarter. That would be the third quarter in a row with sales growth above 10%, suggesting that the projected profit gains are not being produced solely through lower costs or reduced share counts.

For investors considering an index-tracking product such as the Vanguard S&P 500 ETF, the distinction matters. The fund owns the same companies represented by the index and was trading at about $713 per share at the time of the report. A falling forward multiple can make an index appear more reasonable even while it remains close to a record price.

The valuation depends on future earnings

The S&P 500’s forward price-to-earnings ratio was below its five-year average of 19.8, though it was still above the 10-year average of 19.0. On that measure, the market looked less expensive than it had been over the recent five-year period.

The picture changes when current prices are compared with profits already reported. On a trailing basis, the index traded at 25.5 times earnings, above its five-year average of 24.4 and its 10-year average of 23.6. The apparent discount therefore rests on analysts being broadly correct about the earnings companies are expected to produce.

Those forecasts also depend heavily on a small number of sectors and companies. All 11 S&P 500 sectors are expected to report higher earnings in the third quarter, but the strongest gains are concentrated in energy, technology and communication services.

Energy is projected to lead with earnings growth of roughly 110%, helped by oil prices that averaged about 30% more than a year earlier during the quarter. Technology follows at approximately 63%. Within that sector, chip manufacturers and equipment suppliers are expected to post 126% growth; without those companies, the rest of technology is projected to grow by about 24%.

Communication services is forecast to expand by 51%, with Meta Platforms accounting for much of the strength. Analysts expect the social media company’s third-quarter earnings per share to reach $6.74, compared with $1.05 a year earlier.

Strong growth may eventually slow

The estimates imply that the current pace will not continue indefinitely. Analysts expect S&P 500 earnings growth of 26.5% in the fourth quarter and 31.8% across 2026. Their forecast then falls to about 15% in 2027, including a period of nearly flat growth in the second quarter.

The outlook carries particular risk for chip-related profits if demand for artificial-intelligence infrastructure weakens. Energy earnings could also be vulnerable to changes in oil prices, while the communication-services forecast is unusually reliant on one large company.

Even so, The Motley Fool’s analysis argues that the recent market rise is more encouraging than a rally led chiefly by expanding valuations. The S&P 500 is near its high because anticipated profits have caught up with its price, rather than because prices have raced ahead of earnings. That does not make the index cheap, but it may leave room for investors who buy through a diversified, dollar-cost-averaging approach.