Wall Street analysts generally agree on a positive earnings outlook for the S&P 500 in 2026, with estimates ranging from $300 to $320 per share. This suggests a substantial year-over-year increase of 11% to 19% from the expected earnings this year. However, opinions diverge regarding valuations and the direction of the forward price-to-earnings (P/E) ratio, which is currently near its highest level in five years.
Some experts believe the elevated forward P/E ratio is justified and sustainable, potentially leading to above-average market returns in 2026. Conversely, others view the high P/E as a potential obstacle, limiting gains as it may decline toward its historical average. This more conservative viewpoint is often held by those who believe valuations eventually revert to their historical means.
The Limited Predictive Power of P/E Ratios
While P/E ratios can provide insights into whether prices are relatively cheap or expensive, evidence suggests that the forward P/E ratio has minimal predictive power regarding the stock market's performance over a one-year period.
Schwab analysts Liz Ann Sonders and Kevin Gordon illustrated this point by plotting the one-year return on the S&P 500 against various forward P/E levels since 1958. Their analysis revealed a very weak correlation, essentially indicating that valuation is a poor tool for market timing. The chart shows a chaotic distribution of data points, with instances of both negative and positive returns following a 22x forward P/E.
Here are key takeaways to consider:
- Market Tendency: The stock market generally trends upward, even during periods of high P/E ratios. This is largely attributed to rising earnings and positive earnings expectations, which are fundamental drivers of stock prices.
- Falling Valuations and Rising Prices: Stocks can still increase in value even as valuations decline, provided that earnings grow at a faster rate than prices.
- Long-Term Perspective: The relationship between valuations and stock returns becomes more reliable over extended time horizons, although it is not perfect.
Importantly, the limited predictive power of P/E ratios in the short term does not render valuation metrics useless. However, investors should be prepared for unexpected and potentially irrational market behavior in the short run.
2026 Targets from Major Firms
Oppenheimer's John Stoltzfus projects an S&P 500 year-end target of 8,100, based on $305 earnings per share. This optimistic outlook is supported by the resilience of the U.S. economy and the better-than-expected corporate results. Fundstrat's Tom Lee offered a more conservative target of 7,700, based on $307 EPS, highlighting the "Wall of Worry" as a tailwind for the bull market and anticipating dovish monetary policy from the Federal Reserve. Goldman Sachs' Ben Snider set a year-end target of 7,600, based on $305 EPS, incorporating forecasts for solid U.S. GDP growth, a weaker U.S. dollar, and continued earnings strength among large technology stocks. They anticipate 12% EPS growth for 2026, driven by revenue growth and profit margin expansion.
Interestingly, industry analysts' bottom-up price targets are closely aligned with the strategists' top-down forecasts. FactSet reports that industry analysts, in aggregate, predict the S&P 500 will reach 7,968.78 within 12 months. This bottom-up target price is calculated by aggregating the median target price estimates for all companies in the index.
FAQs
What is the expected S&P 500 earnings per share (EPS) for 2026, and how much growth does it represent?
Wall Street analysts estimate the S&P 500 EPS to be between $300 and $320 in 2026, which represents an 11% to 19% increase from the expected earnings this year. This positive outlook is a key factor influencing market predictions.
Are high P/E ratios a good or bad sign for the stock market in 2026?
Opinions are divided; some believe the current high forward P/E ratio is justified and could lead to above-average market returns, while others view it as a potential obstacle, limiting gains as it may decline toward its historical average. The article suggests P/E ratios have limited predictive power in the short term.
What are some S&P 500 price targets for 2026 from major firms, and what are the reasons behind them?
Oppenheimer projects 8,100, Fundstrat 7,700, and Goldman Sachs 7,600. These targets are based on factors like strong earnings, U.S. economic resilience, dovish monetary policy, solid GDP growth, and a weaker dollar.
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