Accelerating earnings growth fuels the boom market

As the bull market matures, accelerating earnings growth should support a continuation of the upturn. Stocks have rebounded globally from the bear market of 2022 and the S&P 500 index, for example, is up 50% from its fall 2022 lows. However, the S&P 500’s “earnings per share” have not yet grown properly: Q1’2024 EPS is estimated at USD 57, compared to USD 53 in Q1’2023 and USD 55 in Q1’2022. This has led to a significant tightening of share valuations.

However, the consensus among analysts (and, judging by the behavior of share prices, investors as well) is for a significant acceleration in earnings growth. SP500 earnings are expected to grow 9% this year, accelerating to 14% in 2025. By 2026, EPS are forecast to jump to USD 300, up 34% from USD 223 in 2023.

This growth is supported by both revenue growth and steadily improving profitability as measured by EBIT margin.

Rapid earnings growth combined with the S&P 500's high profitability (ROE of 18%) should also explain the high prices: The index trades at 21 times forward 12-month earnings and 19 times forward 24-month earnings.



As history shows, the levels correspond to previous bubble levels. The question is whether we are in the early stages of a new earnings growth cycle where strong earnings growth will drive valuations back to attractive levels.

Earnings growth is not just limited to the other side of the Atlantic, Europe is also emerging from the earnings slump. Here, too, earnings forecasts have risen to peak levels in a similar fashion.