S&P 500 forward P/E at 21 versus trailing 28 signals high earnings

The S&P 500 is trading at a forward price‑earnings (P/E) ratio of 21, well below its trailing P/E of 28, a spread that historically only appears at market extremes such as the year 2000【1】.
This gap implies investors are betting on unusually strong earnings growth over the next 12 months, a scenario that has materialized in fewer than one in five quarters since 1989【1】.

Why the spread matters

The forward P/E uses the same price numerator as the trailing P/E, so the difference reflects the gap between last‑twelve‑month (LTM) earnings and next‑twelve‑month (NTM) earnings expectations【1】. Professors Aswath Damodaran and Itzhak Ben‑David explain that the spread is essentially a direct measure of expected earnings growth, and that such a wide gap has historically coincided with periods of earnings rebounds after sharp declines (1994‑95, 2003‑04, 2009‑11, 2021‑22)【1】.

Analyst forecasts and valuation risk

Ben‑David notes that forward P/E looks “reasonable” only because it incorporates earnings that have not yet occurred, and past episodes with a similarly wide spread ended with earnings disappointments, multiple‑year valuation compressions, or both【1】. A 2024 working paper with Alex Chinco found that analysts often set price targets by applying trailing P/E multiples to forecast earnings, effectively restating optimism rather than providing an independent valuation check【1】. Additional research by Gao and Wu (2008) suggests trailing P/E outperforms forward P/E in predicting future growth, reinforcing the view that a low forward P/E does not guarantee cheapness【1】.

What to watch

• Q2 earnings season: Corporate results and forward guidance starting next week will reveal whether earnings can meet the aggressive forecasts embedded in the forward P/E spread【1】.
• Analyst revisions: Any downward adjustments to earnings forecasts could narrow the spread and trigger a market pullback, as seen in prior episodes.
• Historical valuation benchmarks: The cyclically adjusted price‑earnings (CAPE) ratio, which averages a decade of inflation‑adjusted earnings, remains high and may signal overvaluation despite the low forward P/E【1】.

The key question remains whether companies can deliver the near‑term earnings surge that the current forward P/E assumes; a failure would likely compress valuations and test the market’s resilience.