With the S&P 500 .SPX up about 13% year-to-date, Lisa Shalett, chief investment officer and head of the global investment office at Morgan Stanley Wealth Management, pointed to a shift in the drivers behind the benchmark index's performance.
For most of the past 3-1/2 years, Shalett writes that "valuation expansion—not earnings—has driven S&P 500 Index performance." But she noted that this has changed over the past few months with earnings becoming the main driver, which she said marks the cycle’s midpoint and signifies "the start of its 'show me' phase."
Shalett writes that the change is fostering forward-multiple normalization, with the S&P 500 price-to-earnings ratio falling to around 20. The focus on fundamentals has helped with market broadening "with economic strength spreading and investors rewarding firms for delivering rather than simply having a 'dreamy' narrative," according to Shalett.
"Better balance between cyclicals and secular growers and between value and growth stocks, along with the equalweighted S&P 500’s performance, suggest market resilience, as the focus now moves to earnings sustainability and quality," the CIO wrote.
Her research note follows record closes last week for the S&P 500 Value index .IVX, the S&P 500 Equal Dollar Weighted index .SPXEW and the S&P 500 Growth index .IGX among others.
