Is the stock market cheap or expensive? The answer to this common question often includes a reference to the market’s price-earnings ratio (P/E), which is used as a measure of stock market valuation. Investors might be interested in the “P” of the ratio but it all begins with the “E”, which lately has surpassed even the most optimistic estimates.
Coming out of the virus-induced recession, the earnings growth rate has improved dramatically. When 2021 began, the estimated earnings growth rate for first-quarter earnings growth was 15.8%, but by the end of the first-quarter reporting period, actual earnings had improved roughly three times original estimates. By August 13, the growth rate for second-quarter earnings had vaulted to 89.3%. Of the 91% of S&P 500 companies that by August 13 had reported for the second quarter, 87% topped consensus estimates and 87% surpassed anticipated consensus sales. In aggregate, companies reported earnings and sales 17.0% and 4.9%, respectively, above consensus estimates.