The S&P 500's forward price-to-earnings ratio is below its five-year and 10-year averages
Stocks have seen valuations come down all year.
If you had put your money in the S&P 500 at the end of May, you'd have made exactly 1 cent per share by now. Yet most stocks haven't really stood still, and the market as a whole has quietly gotten much cheaper.
The S&P 500 SPX has taken a volatile round trip since the end of May, but it still closed Friday at 7,580.07, just a penny above its May 29 close of 7,580.06. On Tuesday, the index finished lower after early gains gave way to an afternoon wave of selling.
After going nowhere for five months, the S&P 500 is starting to look like a bargain. Its forward price-to-earnings multiple stood at 18.5 recently - its lowest level since April 2025, when stocks were caught in the middle of President Trump's "liberation day" tariff tantrum. That multiple is below both the five-year average - 20.14 - and the 10-year average of 19.55, according to FactSet data.
To be sure, flat performance at the index level hides a pretty big shake-up underneath: Some of the U.S. market's biggest names have finally become cheaper relative to the profits they are expected to earn over the next 12 months. This has been one result of investors recently dumping the stocks that have carried the market over the past few years, and shifting into those that had lagged.
Since the start of the year, the forward P/E ratio for the S&P 500 has dropped nearly 17%, suggesting that investors are taking Wall Street's projections for another year of strong earnings growth with a grain of salt. It's not that share prices have fallen - the index is still up by double digits in 2026 - but their performance hasn't kept pace with the increase in expected profits.
Anthony Saglimbene, chief market strategist at Ameriprise, said the market's focus has shifted from strong earnings growth earlier this year to whether companies can deliver enough returns on their AI investments over the summer. Meanwhile, despite strong earnings and hefty AI spending from hyperscalers, revenue generated by AI has fallen short of expectations - fueling skepticism about whether companies' massive investments, which are increasingly being paid for with borrowed money, will translate into profits.
As a result, tech stocks "have seen a lot more volatility, so it's keeping a dampener on the overall market," Saglimbene told MarketWatch in a phone interview on Monday.
With 60% of S&P 500 companies having reported earnings for the third quarter, the blended earnings growth rate from a year ago has been more than 30%, and earnings are expected to grow another 25% year over year in the fourth quarter, according to FactSet. But the bigger question now is whether companies can sustain that momentum into 2027, when Wall Street analysts are forecasting earnings growth of more than 16%.
What's more, while the third quarter is shaping up to be one of the strongest earnings seasons in recent memory, the headline numbers mask a deeply bifurcated picture beneath the surface: S&P 500 companies are exceeding EPS estimates for the third quarter by just 1.9% in aggregate, which is below the five-year average of around 7.5%, according to FactSet.
"The S&P 500 has an 18-times-earnings forward earnings multiple, so companies need to deliver on the 'E' part of that P/E ratio, and I think that's the question mark right now - especially for some of the AI tech companies where expectations are really high," said Saglimbene.
The price of the benchmark index may have come full circle over the past five months, but the market beneath it looks quite different from earlier this year. The equally weighted S&P 500 XX:SP500EW has risen 4.7% during the same five-month period, underscoring a dramatic rotation as participation has expanded beyond Big Tech and semiconductor names.
Conventional wisdom suggests a low P/E ratio can make a stock more attractive. But history shows little relation between a stock's valuation and its price over the short term.
"The current P/E ratio is healthy, but it doesn't mean that we can't go lower, and it doesn't mean that we can't have more volatility through the rest of the year just because we're through the election," said Saglimbene. "The fundamental environment is still pretty strong, but a lot of that strength has been priced into stocks."
U.S. stocks finished mostly lower on Monday. The S&P 500 was off 0.5%, while the Nasdaq Composite COMP slumped 1.1% and the Dow Jones Industrial Average DJIA rose 0.4%, according to FactSet data.
-Isabel Wang
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