Wall Street strategists are divided over valuations

Core Viewpoint - Wall Street strategists are largely optimistic about S&P 500 earnings growth, projecting earnings per share in 2026 to be between $300 and $320, indicating a year-over-year growth of 11% to 19% from the expected levels of this year [1] Valuation Perspectives - Some strategists believe the elevated forward price-earnings (P/E) ratio is justified and sustainable, which could lead to above-average market returns in 2026 [2] - Conversely, others view the high P/E as a potential headwind for the market, suggesting that it may revert to historical averages, which could limit returns [3] Market Timing and Valuation - Evidence indicates that the forward P/E ratio does not effectively predict stock market performance over a one-year period, with a weak correlation of -0.12 observed [4] - Analysts from Schwab emphasize that valuation is not a reliable market-timing tool, noting that high forward P/E ratios have historically been associated with both negative and positive returns [5] Market Trends - The stock market generally trends upward, even during periods of high P/E ratios, as indicated by the greater number of data points on the right side of the y-axis in historical charts [6] - The increase in earnings expectations is a significant driver of stock prices, contributing to the market rally observed this year despite flattening P/E ratios [7] Earnings Growth vs. Valuation - Falling valuations do not necessarily lead to declining stock prices; stocks can appreciate if earnings grow at a faster rate than prices [8]