What Drove Last Year's Rally?

January 07, 2020

The S&P 500 index rose nearly 29 percent last year, its best performance since 2013. But it might be somewhat concerning that market’s historic run in 2019 was driven almost entirely by a vigorous rise in price rather than steady earnings growth, according to researchers at Goldman Sachs.

That rally in stock prices is a phenomenon known among equity analysts as multiple expansion, referring to price-to-earnings, or P/E ratios. When shares of a company gain more than their underlying earnings, an asset can sometimes be referred to as richly priced. That's what fueled much of last year's rally.

In fact, earnings growth explains just 8 percent of the S&P 500 return last year, Goldman’s researchers wrote. Since 2009, by contrast, earnings growth has been the primary driver of equities, accounting for 67 percent of S&P 500 returns.