Can the bull market continue?

This week’s editorial and related chart are closely related to my most recent editorial from last month. My last editorial discussed the valuation of technology stocks which subsequently broke out to all-time highs prior to this past week’s correction in many of the key U.S. technology companies. This week’s chart examines the global stock market from a slightly different perspective while arriving at a similar conclusion. Emerging Markets (EM) are shown on the lefthand side of the chart followed by the S&P 500 (500 largest U.S. stocks), the S&P TSX (largest Canadian stocks) and, finally, Europe, Australia & Far East stock markets (EAFE) on the righthand side of the chart. The chart depicts the performance of each global stock market year to date (e.g. 10.6% for the Canadian market) as well as the components of that return. As discussed in my prior editorial, the return an investor can expect to earn from purchasing a stock can be broken down into the following components – earnings growth (red bar), dividends (black bar), and Price-to-Earnings (PE) multiple expansion or contraction (grey bar).

Notice the red bar (earnings growth) represents the largest component of the total return for each region of the global stock market in 2026. Even more interesting, notice the grey bar (PE ratio) is negative for Emerging Markets (EM), the S&P 500 and the S&P TSX. A negative grey bar means that the PE multiple has contracted in three of the four stock market regions this year. Stated another way, earnings growth is driving stock market returns with stocks getting cheaper (Price-to-Earnings multiple shrinking) as stocks continue to rally. This represents a very positive environment for the global stock market – public company earnings growth is accelerating at a faster pace than their respective share prices which means stocks have actually become cheaper this year.

The opposite would represent a significant red flag for global stock markets. If the grey bar was positive and the red bar was negative, market returns would be driven by PE multiple expansion (stocks becoming more expensive) and broad-based negative earnings growth would be a potential indicator of a recession. In that environment, substantial caution would be warranted for shorter-term investors in the stock market.

Are we in a stock market bubble? We get this question a lot from both clients and prospective clients. The devil is always in the details – casual market observers and most amateur investors would believe that stocks have become significantly more expensive this year simply because their share prices have increase dramatically in some cases. However, the key to answer this question is valuation (PE multiples) – have stocks become more or less expensive and are earnings accelerating or decelerating? Typically, stock market bubbles coincide with a substantial increase in valuation (PE multiples) as well as a decrease or peak in earnings growth – this week’s chart shows that neither condition is present in the current global stock market.