Strong fundamentals—not investors’ exuberance—are supporting this market
The stock market’s recent string of new highs has investors wondering what comes next.
No one knows with certainty, of course. But as third-quarter corporate earnings results begin trickling in this week, we think it’s important to highlight a key fact: A main reason stock prices are higher this year is because companies keep delivering robust earnings growth—not because investors are overly enthusiastic and willing to bid up stocks regardless of their underlying fundamentals.
That’s good news, as equity market returns fueled by strong earnings tend to be more resilient than returns resulting from rising P/E ratios that depend on often-fickle investor sentiment.
In fact, valuations today are about where they were at the start of 2025. See the chart below:
- Nasdaq 100 is up 16% this year, but valuations have barely risen (+2%).
- S&P 500 is up 13%, with valuations up just 3%.
- The “Mag 7” tech stocks (+16%) and small-cap S&P 600 (0%) have both seen valuations shrink.
- On average, valuations across the four groups haven’t changed at all this year.
Year to Date EPS Growth vs. P/E Percent Change
Bloomberg using blended forward 12-month earnings estimates, calculations by Horizon. EPS= Earnings Per Share, P/E = Price-to-Earnings Ratio, YTD = Year to Date
Past performance is not indicative of future results. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an unmanaged index. Please see attached disclosures.
The main driver left for markets is earnings growth—and it looks strong.
- Nasdaq 100: Up 16% this year, supported by a 14% rise in expected earnings.
- Magnificent 7 stocks: Up 16%, with expected earnings up 17%.
- S&P 500 large caps: Up 13%, with expected earnings up 10%.
- S&P 600 small caps: Even these lagging stocks have expected earnings up 5%.
The upshot: Current stock market levels are being well-supported by a solid foundation.