Wall Street strategists are divided over valuations

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Wall Street strategists are divided over valuations.

stock :: 2025-12-16 :: source - yahoo finance

By Sam Ro

A version of this post first appeared at TKer.co

Wall Street strategists are almost unanimously bullish on the outlook for earnings.

Their estimates for S&P 500 (^GSPC) earnings in 2026 range from $300 to $320 per share, implying 11% to 19% year-over-year growth from this year’s expected level.

However, strategists are divided on valuations — specifically, on the direction of the forward price-earnings (P/E) ratio as it hovers near five-year highs.

Some argue that the elevated forward P/E is justified and sustainable, which should help the market deliver above-average returns in 2026.

Others argue that the high P/E is a market headwind, limiting returns as it potentially gravitates lower toward the long-term mean.

People who believe that valuations tend to revert to historical means (a phenomenon that’s been disputed) lean toward that more conservative view. Maybe they’ll be proven right this time.

TKer Stock Market Truth No. 6: Valuations won’t tell you much about next year

While P/E ratios may help us understand whether prices look cheap or expensive relative to history, evidence shows the level of the forward P/E ratio says effectively nothing about what the stock market will do over a one-year period.

In their 2025 outlook report, Schwab’s Liz Ann Sonders and Kevin Gordon shared this fantastic illustration (which TKer subscribers have seen before). It plots the one-year return on the S&P 500 for various forward P/E levels since 1958.

"You can see that the relationship is a very weak -0.12 — essentially insignificant," Sonders and Gordon wrote. "It underscores the important market truth that valuation is a horrible market-timing tool (as if a good timing tool even exists)."

“Valuation says … nothing,” Schwab analysts wrote. (Source: Schwab) · Yahoo Finance

"Valuation says … nothing," Schwab analysts wrote. (Source: Schwab)

The chart is chaotic. Yes, there are periods where a 22x forward P/E preceded negative returns. But it’s also a level that’s preceded very positive returns numerous times.

Three important notes 🙋🏻‍♂️

First, there are far more dots on the right side of the y-axis in the above chart than there are on the left side, a reminder that the stock market usually goes up. This is true even for periods of elevated P/E ratios.

I’d argue this is because earnings and expectations for earnings are usually going up, and earnings are the most important long-term driver of prices. Indeed, much of the stock market rally this year can be explained by earnings expectations trending higher even as P/E ratios flatten.

Forward earnings estimates continue to trend higher. (Source: Schwab)

Second, falling valuations don’t necessarily mean prices have to fall. Stocks can rise as valuations fall as long as earnings are growing faster than prices. More here, here, and here.

Third, the relationship between valuations and stock returns is stronger when extending the time horizon. But as we discussed here and here, the relationship isn’t perfect.

None of this is to say valuation metrics like the forward P/E are totally useless in the context of how you decide to make adjustments to your portfolio.

Rather, it’s just a reminder that you shouldn’t be surprised if the market does unlikely and arguably irrational things over very short periods of time.

Oppenheimer, Fundstrat, Goldman Sachs set 2026 targets 🔭

Last Sunday evening, Oppenheimer’s John Stoltzfus unveiled his 2025 S&P 500 year-end price target: 8,100. This is on $305 earnings per share (EPS) for the year.

"Our positive outlook for the S&P 500 is based on a number of factors that include persistent resilience evidenced in U.S. economic data, S&P 500 corporate results throughout most of this year beating expectations," he wrote.

On Thursday, Fundstrat’s Tom Lee offered a more modest outlook with his 7,700 target on $307 EPS.

"The significant ‘Wall of Worry’ is a tailwind for the bull market," Lee wrote. "New Fed = dovish policy = positive for stocks in 2H."

Also on Thursday, Goldman Sachs’ Ben Snider set his 2026 year-end target at 7,600 on $305 EPS.

"Our estimates incorporate GS macro forecasts for solid US GDP growth and a weaker US dollar alongside GS equity analyst forecasts for continued earnings strength among the largest technology stocks," Snider wrote. "Our 12% EPS growth forecast for 2026 combines revenue growth of 7% with 70 bp of profit margin expansion."

So far, we’ve been discussing strategists’ (top-down) forecasts. It so happens that the industry analysts (bottom-up) have price targets that are not far from the median strategist’s target.

(Source: FactSet) · Yahoo Finance

"Industry analysts in aggregate predict the S&P 500 will have a closing price of 7,968.78 in 12 months," FactSet’s John Butters wrote. "This bottom-up target price for the index is calculated by aggregating the median target price estimates (based on the company-level target prices submitted by industry analysts) for all the companies in the index. On December 11, the bottom-up target price for the S&P 500 was 7,968.78, which was 15.5% above the closing price of 6,901.00."

A version of this post first appeared at TKer.co