Global stocks keep getting cheaper as they go up

Welcome back from Labor Day weekend, investors. The shortened trading week is packed with inflation data, much-anticipated earnings from Oracle and a continued swirl of questions around the Fed’s next move.

None of that, though, is likely to do anything to derail the fundamental story driving asset prices.

Investors have plenty to worry about but earnings won’t stop confirming that the bull market is intact.

S&P 500 companies have reported absurd and record earnings this year and that strength has actually made stocks cheaper today compared to the start of the year. 

In the second quarter, the S&P 500 earnings per share rose 50.7%, up from 19% in the first quarter.

While a portion of that includes mark-to-market investment returns, earnings still rose 25% without them. 

Meanwhile, forward earnings rose to a record $401.75 a share last week — despite the ongoing conflict in Iran and elevated energy prices, uncertainty with the Fed, and looming midterm elections. 

The fundamentals have been so impressive that veteran economist and prominent market bull Ed Yardeni said Sunday he might soon have to raise his 8,400 S&P 500 year-end target, which is already the highest on Wall Street.

Indeed, valuation multiples continue to contract while earnings improve.

S&P 500 forward price-to-earnings have fallen 12% since the start of the year even as stock prices have gained about 13%. 

But this isn’t just a story of American exceptionalism.

The same pattern is unfolding around the world. 

The MSCI All Country World ex-US index trades at a 13.1x forward P/E, below the 19.8x for the US MSCI. Both those figures have declined sharply since January, as data from Yardeni Research shows. 

For the first time in years, the case for owning stocks outside the US relies on the same calculus as the case for owning them at home.

Earnings are doing the heavy lifting everywhere.