You must wonder why the market keeps expanding the multiple when earnings expectations for Q3 and Q4 this year are muted. The answer could be that we are in the fear of missing out or speculative part of the investment cycle.
In Q2, earnings did surprise many on the upside. Tariffs have yet to have any adverse impact on corporate profits, but that was the expectation for Q2 as we saw earnings expectations come down. We have seem some recovery for Q4, but the current quarter is muted.
When we look into 2026 and 2027, we can see forward based expectations are high. On a market cap weighted basis, price/earnings (P/E) ratios are at extreme levels seen prior to the tariff shock in April. Investors are paying top price for expected earnings growth for the next few years. Better hope that inflation or employment is not a problem.
When we look at the S&P 500 on an equal weight basis (all 500 stocks at 0.2 per cent each), we see a much better average P/E. This suggests that the artificial intelligence and technology inspired leadership is where the valuations are more extreme, but it’s also where the growth lies.
From an investment standpoint, I’ve always advocated for a growth at a reasonable price (GARP) approach. Turns out, there is an ETF that focused on companies with more GARP factor. I get asked all the time what my favourite ETF picks are. When the broad market cap indexes are expensive near all-time highs and you want growth exposure longer term, a GARP factor fits the outlook. For now, an equal weight S&P 500 (RSP) looks to be better value. Buy GARP on a correction, buy equal weight with markets fully valued.
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