What about valuation?

Despite a slight pullback in recent sessions, the S&P 500 is in good shape. Since the beginning of the year, the index has gained 24%, making it one of the most prolific years so far this century.

Stock market performance must be seen in the context of companies' financial performance. In this respect, in recent quarters, markets have accelerated much faster than corporate earnings. Such a gap has not been seen for over a decade. However, this does not mean that companies are in poor health: earnings per share (EPS) growth for S&P 500 companies has been 7.5% since November 2023, while over the same period the index has soared by 26%.

The chart below shows that the S&P 500's valuation is above its ten-year average. The P/E is over 28 times, compared with 22 times at 10 years and 24 times at 5 years.

"Trailing" means that the ratio is calculated by dividing the current price by the NIB over the past 12 months; as opposed to the "Forward" P/E, which is calculated by dividing the current price by the estimated NIB for the coming year.

In the third quarter, companies outperformed estimates

In terms of earnings per share (EPS), 75% of S&P 500 companies exceeded analysts' expectations in the third quarter of this year. This figure may seem high. In reality, this 75% figure is equivalent to the average observed over the past 10 years. In fact, companies steer analysts towards forecasts that they believe - if all goes well - they will be able to exceed, to create the surprise effect often appreciated by the markets. For companies, the aim is to submit cautious forecasts - so as, if possible, to be able to exceed them - but not too cautious. Excessive caution will be misinterpreted by the markets: a market at half-mast, weakness in the face of competitors, internal problems, etc.

International exposure is an advantage

Cumulatively, S&P 500 companies generate 59% of their sales in the United States and 41% internationally. Factset's study also shows that companies with an international presence enjoy higher growth than others. Companies generating less than 50% of their revenues in the US reported third-quarter profit growth of 12.9%. Conversely, those whose US sales exceed 50% of total revenues saw their profits rise by just 1.5%.

Which sector is doing best?

In the third quarter, communication and media services saw the strongest profit growth (+23%), followed by healthcare and consumer discretionary. Technology companies lost ground compared to last year. At the other end of the scale, the worst performers are energy (which already saw the sharpest decline in EPS last year), materials and construction.

So, is the S&P 500 overvalued? It's hard to say whether the index's valuation is fair or not. If we look solely at corporate health, the current gap between S&P 500 performance and corporate growth may be hard to maintain in the future. But the stock market is also dictated by macroeconomics. Thus, Trump's policies and a favorable easing by the Fed could help the indices to rub shoulders with new highs.