The S&P 500 Index and its ETFs, like VOO and SPY have moved sideways this month and are hovering slightly below their record highs. This consolidation, however, may turn into a calm before the storm ahead of a major comeback as evidenced by some major numbers, including its valuation and earnings growth.
S&P 500 Index is benefiting from strong earnings growth
One of the key catalysts for the S&P 500 and its ETFs like VOO and SPY is that its earnings growth has escalated in the past few years. FactSet data showed that earnings growth stood at over 50% in the last quarter. This growth was mostly because of the ongoing artificial intelligence (AI) boom and tariff refunds from the US government.
Most companies published strong numbers. For example, Nvidia’s revenue jumped by 108% in the second quarter, and the management expects this surge to continue. It expects that its 2027 revenue will grow by 77%, much higher than what analysts were expecting.
Other notable gainers were companies like Dell, SanDisk, Western Digital, and Micron. Banks like JPMorgan, Goldman Sachs, and Morgan Stanley also published strong numbers during the quarter. Energy companies like ExxonMobil, Chevron, and Marathon released strong results.
Most importantly, many companies delivered strong earnings guidance for the third quarter and the full year.
VOO, SPY, and US stocks are bargains
Meanwhile, there are signs that US stocks are trading at bargain levels despite the ongoing revenue and earnings growth. The FactSet report notes that the forward P/E ratio is 19.5, slightly lower than the five-year average of 19.8.
This valuation is notable because it is happening at a time when growth is accelerating. Indeed, analysts expect third-quarter earnings growth to be 28.5%, slightly higher than the previous estimate.
If this is the final number, it will mark the third consecutive quarter in which the S&P 500 Index had earnings growth of over 20%. Most notably, real earnings tend to come out higher than expected. For example, before the last earnings season, the estimate was that earnings growth would be 25%.
These numbers explain why analysts are highly bullish on the S&P 500, SPY, and VOO ETFs. For example, Goldman Sachs analysts have hiked their S&P 500 target to 8,000, while Citigroup boosted its target to 8,100. Yardeni Research sees the index rising to 8,400 points.
S&P 500 Index technical analysis
SPX chart | Source: TradingView
The daily chart shows that the SPX Index bottomed at 7,300, its lowest level in June and July this year. Since then, it has formed a bullish flag pattern, a common continuation sign in technical analysis. It is now in the flag section of this pattern.
The index has remained above the 50-day and 100-day Exponential Moving Averages (EMA), which is a bullish sign. Therefore, the most likely scenario is where the index makes a bullish breakout, with the next key target to watch being at 7,814, its highest point in August. A move above that level will point to more gains, potentially to 8,000.
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