📌 U.S. Stock Gains Broaden, Earnings Support Elevated Valuations
The rise in U.S. stocks is spreading from index heavyweight stocks to a broader group of equities. The Value Line Geometric Index, which represents the performance of the market’s median stock, closed above 700 for the first time this week. The index’s breakout means that recent record highs are no longer merely the result of a handful of mega-cap companies lifting the index; more ordinary constituent stocks are also participating.
Small-cap stocks provide another layer of confirmation. SML requires constituents to have an earnings history, while IWM has relatively fewer inclusion restrictions; the two respectively correspond to stricter and broader small-cap observation criteria. Both indexes closed at record highs, at least indicating that small-cap strength does not depend on a single construction methodology; among them, companies with a record of profitability are also participating in the rise.
Improving breadth does not automatically mean an indiscriminate increase in risk appetite; earnings are the more critical support. The S&P 500 has risen about 13% year-to-date, but the forward price-to-earnings ratio has fallen from about 22 times at the end of last year to about 20 times. The decline in the multiple is not due to a pullback in share prices, but rather because corporate earnings growth has outpaced share prices. In the latest earnings season, S&P 500 second-quarter earnings grew by more than 30% year over year, one of the faster growth rates since 2021.
Therefore, the core question at current high levels is not only whether the index can continue to rise, but whether earnings can continue to materialize. If earnings growth continues, the lower forward price-to-earnings ratio will cushion some of the pressure at high levels; if earnings slow, the spread of breadth itself may not be sufficient to sustain valuations.
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