Soaring earnings estimates are pushing P/E ratios lower
As we move into the second half of 2026, U.S. large-cap stocks may be on pace to deliver their fourth straight year of double-digit gains, with the S&P 500 Index up 11.4% through July 10, 2026.
But if you assume this extended bull run has pushed stock market valuations into the stratosphere, think again.
The fact is, a key valuation metric (the S&P 500’s 12-month forward price-to-earnings (P/E) ratio) is actually down 7.7% year to date (see the chart). The forward P/E ratios for several other large-cap market indices and segments are also lower than at the start of the year, with the Nasdaq-100 Index’s forward P/E down 6.5% and the Mag 7 stocks’ valuation as a group down 15%.
The reason for lower stock valuations despite higher prices boils down to one word: earnings. Overall, estimated corporate profits (the “E”) are appreciating even faster than are the indices (the “P”), pulling down valuations even as stocks post gains. For example, Wall Street is looking for the S&P 500’s second-quarter earnings to rise by 23.3%. If that comes to pass, it would mark two consecutive quarters of 20% earnings growth.
We’ll know soon whether companies are living up to those high hopes, as the second-quarter earnings season starts this week. For now, lower valuations driven by earnings acceleration could be an opportunity to reallocate some assets from momentum plays (such as semiconductors) to other, less pricey areas of the market.
Authored by Mike Dickso
Originally posted on ETF Trends
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