Companies have surpassed third-quarter earnings expectations, but the stock market is looking past the strong figures.
The solid earnings results reflect the third quarter’s far better-than-expected economic growth. The fact that the aggregate earnings “beat” has outpaced that of sales illustrates that profit margins are also better than anticipated—especially as the increases in product costs and employee pay are moderating. All sectors thus far have beaten bottom-line estimates.
The problem is simple: Stocks were just too expensive coming into earnings season, and, on top of that, most companies have refrained from lifting their profit forecasts. That’s partly because stocks were expensive already. The S&P 500 has rallied for most of this year: It came into this earnings season trading at about 18 times analyst’s per-share earnings estimates for the coming 12 months, up from just under 17 times at the start of the year. Many on Wall Street agree that the index’s current valuation multiple is high, particularly as higher interest rates make future profits less valuable and should eventually weigh on multiples.
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