The forward earnings of all three S&P market-cap indexes rose to record highs again last week. On a year-over-year basis, forward earnings for the S&P 500, S&P 400 and S&P 600 are up 5%, 7.7% and 9.3%, respectively. That's provided the underlying support for 22.8%, 28% and 30.4% year-over-year gains in their comparable stock price indexes. Obviously, rising valuations accounted for most of the stock price gains over the past year. But those gains wouldn't have happened if earnings had been decreasing instead of increasing.
I have been forecasting that S&P 500 forward earnings will rise to $118 a share by the end of the year, which is also our forecast for 2014's earnings. However, forward earnings is already up to $116.84 during the week of June 13.
One note of caution - we are a bit surprised by the strength in forward earnings, given the recent weakness in S&P 500 forward revenues. We monitor lots of domestic and global economic indicators that are highly correlated with S&P 500 revenues. The year-over-year growth rates of almost all of them are in the low single digits and seem to be heading toward zero. For example, U.S. manufacturing and trade sales rose just 1.5% year-over-year during April.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.