Here's What the S&P 500 Did the Last 2 Times Its Earnings Grew 25%-Plus for 3 Straight Quarters
Earnings for S&P 500(SNPINDEX:^GSPC) companies are rising at a pace the index has rarely kept up. With around a quarter of the index's companies having reported, FactSet's Oct. 23 update put the third-quarter blended growth rate at 29.5% year over year (that number combines actual results so far with estimates for companies still to report).
If it holds, it will mark the third straight quarter of earnings growth over 25%. FactSet's late-season tallies put the first quarter of 2026 at around 28%, and the second at about 52%, so growth has slowed from the second quarter's rate but held above that line.
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Meanwhile, the index closed at 7,743.98 on Oct. 28, under 1% below its record close from Oct. 6. And in FactSet's numbers since 2009, there have been just two earlier streaks like this.
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The index headed opposite ways after the last two
The first ran from the fourth quarter of 2009 through the third quarter of 2010, as corporate profits bounced back from the financial crisis. Earnings in the fourth quarter of 2009 more than doubled from a year earlier, up about 109%. The second streak covered all four quarters of 2021, when second-quarter growth was roughly 90% against a year-ago quarter hit by the pandemic.
Interestingly, 2018 nearly made it three. FactSet put that year's first three quarters at just below 25%, exactly 25%, and 25.9%.
To line each streak up with today, I measured from the last close of the month when its third quarter's reporting season started. From 1,101.60 on July 30, 2010, the index rose around 17% in the next 12 months, to 1,292.28. From 4,605.38 on Oct. 29, 2021, it dropped around 15%, to 3,901.06. The second period had a record close on Jan. 3, 2022, and then a bear market that bottomed on Oct. 12, 2022.
The exact start date doesn't matter much, either. From any trading day in July 2010, the index was 17% to 31% higher a year later. From any trading day in October 2021, it was 12% to 20% lower.
Both came out of a recession
The two earlier streaks had something this one doesn't. Each started within a year of a recession's end, which the National Bureau of Economic Research dates to June 2009 and April 2020.
Those huge growth rates partly reflected how much profits had dropped right before them.
This time, the index is growing fast on top of a year that was already growing. FactSet said a 29.5% third quarter would also be the eighth straight quarter of double-digit earnings growth. And blended revenue growth for the third quarter was 12.7%, according to the same update.
Of course, part of this year's jump came from gains that might not repeat. In the second quarter, Alphabetbooked a $98 billion gain on its equity investments, and Amazonbooked a $53.4 billion investment gain, according to FactSet. But without Alphabet and Amazon , FactSet put second-quarter growth at around 34% -- still well above 25%.
Valuation: lower than in 2021
The other big difference is valuation. On Oct. 29, 2021, the S&P 500 traded at 21.1 times its expected earnings over the next 12 months, according to FactSet. That was well above its five-year average of 18.3 back then.
And the Federal Reserve started hiking interest rates in March 2022. The index fell for most of that year.
In FactSet's Oct. 23 update, the forward price-to-earnings ratio was 18.7, a bit below its five-year average of 19.8. It was 22.2 in mid-January and 21.1 in late May. So the index hit a record this year while its forward price-to-earnings ratio dropped, because expected earnings rose faster than the index did.
Are two streaks enough history to go on? Probably not, especially when they ended in opposite places.
What the record does show, I think, is that fast earnings growth alone didn't decide the year that followed. In 2022, the price investors had paid for those earnings, and rising interest rates, arguably mattered more.
By those measures, today's setup looks better than late 2021's. Growth isn't just a rebound, and the index trades below its five-year average relative to expected earnings. But that doesn't make the S&P 500 cheap, and it may still drop as it did in 2022.
For long-term money, I'd keep adding to an index fund that tracks the S&P 500 on whatever schedule was already in place. The streak is good news for the companies in the index, but I don't think it says much about timing.
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Here's What the S&P 500 Did the Last 2 Times Its Earnings Grew 25%-Plus for 3 Straight Quarters was originally published by The Motley Fool
