The S&P 500 has repeatedly hit record highs this year, but Citadel Securities points out that its valuation has not expanded in tandem. Currently, the S&P 500's 12-month forward P/E ratio is approximately 20.1, lower than the approximately 23.1 in October last year, meaning that while the index has risen, the forward P/E ratio has actually compressed by about 15%. The core reason is that the upward revision of earnings expectations is outpacing the rise in stock prices.
The S&P 500's EPS growth rate in the second quarter is approaching 33% year-on-year, and it is experiencing the strongest earnings season upward revision path since at least 2000. The equally weighted S&P Forward P/E ratio is approximately 17.1, and the Nasdaq 100's forward valuation is already below its 10-year average. Therefore, Citadel believes that this round of gains differs from a rally purely driven by valuation expansion; it is currently more supported by earnings. However, this also means that the market will be more sensitive to earnings realization: if EPS upward revisions slow down while stock prices continue to rise, valuation pressures may reappear.
