The simplest way of explaining the selloff that has driven U.S.
stocks closer to a bear market than any time in five years is that
investors are adjusting to a new earnings reality. Based on share
valuations, that reality is pretty bleak.
While equity analysts
continue to predict a rebound in Standard & Poor’s 500 Index profit
this year, stocks are no longer buying it. Evidence can be seen by
plotting the forward price-earnings ratio against its historical
average, a comparison that could be read as suggesting investors don’t
see profits rising anytime soon.
The S&P 500 has a forward 12-month P/E ratio of 15.2 times, the lowest in two years and down 13 percent from 17.4 at the start of 2016, according to Bloomberg data.
One way to get the multiple back to its historical average of 16.6 would be for corporate profits to fall this year. Currently, analyst estimates compiled by Bloomberg call for a 4 percent increase. The index climbed 2 percent at 4 p.m. New York time.
Contracting valuations haven’t gone unnoticed in official circles. The Federal Reserve said in its semi-annual monetary report on Wednesday that the drubbing in stocks has pushed P/E forecasts back in line with historical levels.
As equity investors grapple with threats ranging from slowing global growth to a strong dollar, their solution has been simple: sell stocks pending signs of a recovery.
They’ve done it for five days in a row, extending losses since last May’s high to 14 percent. S&P 500 companies are in the process of reporting their third consecutive quarter of earnings declines and are expected to see profits fall through June, analyst estimates show.
Among S&P 500 members, combined quarterly income growth has turned negative in 33 instances since 1937, data compiled by Bloomberg and S&P Dow Jones Indices show.
While half of those episodes lasted no more than six months, the others almost always dragged on, spanning five quarters on average. Out of the 17 occasions where earnings fell for at least three quarters, 14 occurred within three months of a bear market.
The S&P 500 has a forward 12-month P/E ratio of 15.2 times, the lowest in two years and down 13 percent from 17.4 at the start of 2016, according to Bloomberg data.
One way to get the multiple back to its historical average of 16.6 would be for corporate profits to fall this year. Currently, analyst estimates compiled by Bloomberg call for a 4 percent increase. The index climbed 2 percent at 4 p.m. New York time.
Contracting valuations haven’t gone unnoticed in official circles. The Federal Reserve said in its semi-annual monetary report on Wednesday that the drubbing in stocks has pushed P/E forecasts back in line with historical levels.
As equity investors grapple with threats ranging from slowing global growth to a strong dollar, their solution has been simple: sell stocks pending signs of a recovery.
They’ve done it for five days in a row, extending losses since last May’s high to 14 percent. S&P 500 companies are in the process of reporting their third consecutive quarter of earnings declines and are expected to see profits fall through June, analyst estimates show.
Among S&P 500 members, combined quarterly income growth has turned negative in 33 instances since 1937, data compiled by Bloomberg and S&P Dow Jones Indices show.
While half of those episodes lasted no more than six months, the others almost always dragged on, spanning five quarters on average. Out of the 17 occasions where earnings fell for at least three quarters, 14 occurred within three months of a bear market.
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