Investment research firm Yardeni Research said it views the stock market as offering compelling value at current levels, citing a mix of lower valuation multiples and robust earnings growth as the underpinning of that stance.
In a note released on Monday, Yardeni pointed to a notable decline in the S&P 500’s forward price-to-earnings (P/E) ratio. The forward P/E reached a peak of 23 last October and has since fallen 17.8% to 18.9, even as forward earnings for the index climbed 12.7% over the same interval to reach record-high levels. The firm framed this divergence between a softer multiple and stronger earnings as central to its positive view.
Yardeni traced the initial compression in the valuation multiple to concerns about the profitability of AI-related companies, followed by a further downward move driven by fears that the war would precipitate a global recession. Despite those investor worries, industry analysts continued to hike their collective earnings forecasts, Yardeni said.
The firm also noted an unusual steadiness in near-term analyst estimates. Typically, analysts’ projections drift downward as reporting season approaches. In this cycle, however, Q1 estimates remained steady in the face of geopolitical uncertainty, and analysts subsequently raised forecasts for Q2 through Q4, Yardeni observed.
Market-level datapoints cited in the note include the S&P 500’s closing value of 6,582 on Friday and a year-to-date performance that is 3.8% lower. Yardeni emphasized that earnings strength is not confined to large-caps: forward earnings for the S&P 400 and S&P 600 are also moving higher alongside the S&P 500, a broadening that the firm views as a bullish development.
At the sector level, several industries now show forward earnings at record highs: Consumer Discretionary, Consumer Staples, Financials, Industrials, and Utilities. The S&P 500’s aggregate forward profit margin has risen to a record 15%, with the Information Technology sector leading on profitability at a 31.4% forward profit margin.
Yardeni highlighted that the IT sector’s forward P/E of 20.7 has converged with the S&P 500’s forward P/E of 19.9, a development the firm described as creating an attractive entry point for investors with a multi-year horizon.
The firm addressed comparisons to the dot-com era, noting that while Information Technology and Communication Services together account for 43.6% of the S&P 500’s market capitalization - a level higher than the dot-com peak - the current earnings picture is notably stronger. The forward earnings share for those two sectors is 42%, just 1.6 percentage points shy of their market-cap share. By contrast, at the dot-com peak, the gap between market-cap share and forward earnings share exceeded 15 percentage points.
In Financials, Yardeni pointed to a forward P/E of 14.3, down from 16.4, even though the sector carries the second-highest forward profit margin in the S&P 500 at 21.4%. The firm suggested that this de-rating could be overdone if private credit stress proves contained.
Yardeni also cited a behavioral signal from corporate insiders. According to the note, insiders became more bullish over the past two weeks as stock prices moved lower, a development the firm highlighted alongside its valuation and earnings analysis.
Contextual takeaway - Yardeni’s view rests on a combination of compressed valuation multiples, record forward earnings and rising forward profit margins across multiple sectors. The firm regards the current environment as offering an attractive multi-year entry point for investors, while noting areas where de-rating may have been excessive.