Will Strong 2Q17 Earnings Drive S&P 500 Valuations Higher?
The S&P 500 Index in July
The S&P 500 Index (SPY) rose nearly 2% in July 2017. The index touched a record high of 2,484 on July 27. In a previous series, we saw that the S&P 500 Index ended its first half of 2017 on a positive note. It rose nearly 7.6% in 1H17. Investors expect that the rally in the S&P 500 Index will continue in 2H17.
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The companies of the S&P 500 Index started releasing second quarter earnings in mid-July. On a year-over-year basis, the 2Q17 earnings reports have been spectacular. Among the various sectors of the S&P 500 Index, the energy (XLE), technology (XLK), and financial (XLF) sectors are posting strong 2Q earnings.
Valuations and earnings
Many fund managers believe that the strong earnings, and not Trump’s reform agenda, are driving the market rally. Currently, the S&P 500 Index is trading at a trailing price-to-earnings multiple of 21.7x. The forward price-to-earnings multiple stands at 18x, which is much higher than the historical average of 15x. The stronger earnings growth in Q2 is supporting the higher valuation of the S&P 500 Index.
The S&P 500 Index has risen almost 4.6% in the past year. According to Reuters estimates, the S&P 500 Index is expected to provide double-digit earnings growth of 10.8% in 2Q17.
In the next part of this series, we’ll look at the performance of the financial sector in July 2017.