The upward momentum in the US market is driven by both analysts’ optimism regarding earnings and investors sharing that view, driving their willingness to pay valuations higher multiples, according to Yardeni Research.
In a Twitter post, the consultancy said, “while the S&P 500's forward earnings are rising, the market's valuation is also evolving”. Yardeni Research is a sell-side consultancy headed by noted economist and investment strategist Ed Yardeni.
Also read: US markets on the brink of 'Mother of all Melt-ups', says Yardeni Research
In a Twitter post, the consultancy spoke about the equation that determines prices: P = P/E x E. This is a formula that the Big Bull Rakesh Jhunjhunwala held sacred.
In this, investors determine the first variable or P/E and analysts determine the second (E).
Both variables are seeing being driven by positive sentiment from both segments of participants, according to the consultancy.
“Analysts remain optimistic on S&P 500 forward revenues, which hit a record high in the June 29 week. Analysts have also stopped lowering their consensus expectations for the S&P 500's forward profit margin. As a result, S&P 500 forward earnings have been rising in recent weeks,” the post said.
“These weekly data on forward revenues, earnings, and profit margin are excellent coincident indicators of the actual quarterly data reported by the S&P 500 companies,” it added.
The consultancy pointed out that the investors seem to share the analysts' optimism. This can be seen from their willingness to pay a higher valuation multiple for the forward earnings expectations. “The forward P/E increased 400bps from 15.1 on October 12, 2022, to 19.1 today,” the post pointed out.
Investors seem particularly optimistic about the MegaCap-8. The MegaCap-8 stocks include Alphabet, Amazon, Apple, Microsoft, Netflix, Nvidia and Tesla.
“The MegaCap-8 now account for 27% of the S&P 500's market cap and have a forward P/E of 31.0. Excluding them, the S&P 492 has a forward P/E of 16.5,” the post said.
While there is positive sentiment around the stocks, it could only get better, according to the consultancy. “There's room for them to get more enthusiastic about the rest of the market,” their post stated.
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