The Forward P/E Ratio Has Collapsed

James Mackintosh notes that the recent correction in the S&P 500 has brought valuations down enough for it to be noticeable.

From the Wall Street Journal:

Only once before have U.S. earnings expectations risen so far, or so fast, as they have this year. Yet, investors couldn’t care less as shares are down. The result is that Wall Street’s favorite valuation measure has fallen at a speed usually only seen in a crisis.

That doesn’t mean stocks are a screaming bargain. But the 12-month forward price/earnings ratio on the S&P 500 has fallen from a 16-year high of 18.6 times adjusted earnings at the end of January to 16.4 times at Tuesday’s close, putting it back to where it stood in 2014

He says that this sort of thing has only really happened before or during crisis periods, like the blowup of Long Term Capital Management in 1998 or the Greek debt crisis in 2010.

I don’t know of any current crises happening today but maybe market participants believe one is on the way?

Or, as Ben Carlson described yesterday, it’s just that multiples are coming down as lower-risk Treasury bonds are offering more competition for capital, now that there’s a yield attached to them.

From A Wealth Of Common Sense:

Rising interest rates and their impact on stock market performance should also be considered from an asset-allocation perspective. Investor capital has to go somewhere — stocks, bonds, cash, real estate or alternative investments — and those allocation decisions are often driven more by relative value than absolute value.

I’d also point out that part of the reason for the collapse in forward P/E, beyond just the fact that stocks have fallen from their highs, is that earnings estimates have shot up during the course of the year. We go into Q2 earnings season with the consensus expecting 18% growth. That same consensus was at 12% growth for S&P earnings when 2018 began.

 

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  1. The Forward P/E Ratio Has Collapsed – Financial Solutions commented on Apr 13

    […] James Mackintosh notes that the recent correction in the S&P 500 has brought valuations down enough for it to be noticeable. From the Wall Street Journal: Only once before have U.S. earnings expectations risen so far, or so fast, as they have this year. Yet, investors couldn’t care less as shares are down. The result is that Wall Street’s favorite valuation measure has fallen at a speed usually only seen in a cris… Source: http://thereformedbroker.com/2018/04/13/the-forward-p-e-ratio-has-collapsed/ […]