This surprising wrinkle in the 2026 bull market could drive stocks higher
This surprising wrinkle in the 2026 bull market could drive stocks higher.
Imagine where the stock market would be this year if price-to-earnings (P/E) ratios were expanding too.
The quick insight: Despite investor enthusiasm for owning stocks this year and there being only one 5% or more pullback, valuation in the broader market hasn't kept pace.
The S&P 500's forward P/E ratio is now below where it started in 2026, Truist chief market strategist Keith Lerner pointed out (see chart below).
The reason: The P/E ratio is a simple fraction, with the "P" being the price of a stock or market and the "E" representing earnings. When the denominator grows faster than the numerator, the multiple compresses.
This year, corporate earnings have been quite strong, with the S&P 500 tracking toward back-to-back quarters of above 20% earnings growth. With companies hauling in near-record profits, the "E" has risen significantly, pulling down the overall valuation multiple for the S&P 500 even as stock prices remain historically high.
What's next: "We are in an earnings boom, with estimates rising across large, mid, small caps, and emerging markets," Lerner said.
The estimated year-over-year earnings growth rate for the second quarter is 23.3%, which is above the five-year average of 16.4% and the 10-year average of 10.3%, according to data from FactSet. If 23.3% is the actual growth rate for the quarter, it will mark the second consecutive quarter of year-over-year earnings growth above 20% and the seventh consecutive quarter of double-digit growth for the index.
Ten of the 11 sectors in the S&P 500 are expected to report year-over-year earnings growth, led by the Energy, Information Technology, and Materials sectors.
The bottom line: If the S&P 500 delivers above its expected 23.3% earnings growth for the second quarter, it could help support the "P" part of the P/E ratio equation as analysts race to mark up estimates further. That could set the stage in the third quarter for a one-two punch of rising stock prices and rising earnings, which the bulls would gladly welcome.
Brian Sozzi is Yahoo Finance's Executive Editor and a member of Yahoo Finance's editorial leadership team. Follow Sozzi on X @BrianSozzi , Instagram , and LinkedIn . Tips on stories? Email brian.sozzi@yahoofinance.com.
Click here for in-depth analysis of the latest stock market news and events moving stock prices
Read the latest financial and business news from Yahoo Finance
Sinergia Empresarial continuará el seguimiento de esta información sobre this surprising wrinkle in the 2026 bull market could drive stocks higher y ampliará la cobertura conforme se confirmen nuevos elementos relevantes para el ecosistema empresarial.
