uploads///Earnings Growth of the SP  Index is Improving Gradually

Will Strong 2Q17 Earnings Drive S&P 500 Valuations Higher?

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Nov. 20 2020, Updated 5:13 p.m. ET

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.

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.

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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.

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