ClearBridge Investments, managing $196 billion in assets, forecasts US stocks will continue rallying in the second half despite elevated valuations, driven by robust corporate earnings growth. The asset manager notes the S&P 500's price-to-earnings ratio above 20x has become the 'new normal' since the COVID-19 pandemic. Jeffrey Schulze, head of economic and market strategy, stated that earnings growth is offsetting high valuation concerns and propelling the market upward, with forward 12-month earnings per share estimates surging 155% cumulatively since the pandemic.
S&P 500 Valuation Sustains Rally Despite High Multiples
ClearBridge reported in its analysis that the S&P 500 index has delivered 157% returns even with price-to-earnings multiples above 20x, achieving annual returns double the historical average. Schulze explained that corporate earnings growth is offsetting high valuation concerns and driving the market's upward momentum.
The firm characterized the recent six-week sideways trading as temporary consolidation within a longer-term uptrend. Schulze noted that historical patterns show the S&P 500 typically generates average additional returns of 5.5% over three months and 10.4% over six months following sharp rallies.
Labor Market Stability and Energy Costs Support Consumer Spending
The US labor market created an average of 111,000 jobs per month in Q2, returning to stable levels. International oil prices declined following easing tensions between the US and Iran, pushing domestic gasoline prices below $4 per gallon.
ClearBridge analyzed that employment stability combined with reduced energy costs will improve real incomes and support consumer spending in the second half.
Midterm Election Year Shows Stronger Earnings Growth Than Historical Average
ClearBridge assessed that seasonal volatility concerns related to the fall midterm elections will likely be limited. Schulze noted that while the S&P 500's average return in the second year of a presidential term historically stands at 4.6%, this year's EPS growth consensus of 23.9% is three times the average of 8.3% for past midterm election years.
Schulze added that if inflation pressure eases due to falling oil prices and bond yields decline, it will create additional favorable conditions for stocks. He concluded that the market is highly likely to continue its upward rally in the second half based on a solid labor market and strong corporate earnings.
FAQ
What is ClearBridge Investments' forecast for US stocks in the second half?
ClearBridge Investments forecasts US stocks will continue rallying in the second half despite elevated valuations, driven by robust corporate earnings growth. The asset manager managing $196 billion stated that forward 12-month earnings per share estimates have surged 155% cumulatively since the pandemic, offsetting high valuation concerns.
Why does ClearBridge believe high valuations will not prevent further gains?
ClearBridge notes that the S&P 500's price-to-earnings ratio above 20x has become the 'new normal' since COVID-19, with the index delivering 157% returns at these multiples. Jeffrey Schulze stated that corporate earnings growth is offsetting high valuation concerns, and historical patterns show the S&P 500 typically generates additional returns of 5.5% over three months and 10.4% over six months following sharp rallies.
