This year’s stock market correction drove valuations to their lowest level since April 2020 for U.S. large, mid and small cap indices. The P/E ratio based on forward earnings is below the average since 2005 for the S&P 400 (mid-caps) and S&P 600 (small caps). While near-term volatility has led to a drop in stock prices from record highs, the fundamentals remain positive for equities.
Here is a brief refresher on P/E ratios
Another relationship we've been studying, to improve client morale during this period of geopolitical turmoil, is between companies earnings and their price levels. The chart below depicts the overall earnings of the entire S & P 500 index and its price levels. The almost 1-1 correlation between earnings and price levels is undeniable. Currently S & P earnings through the first quarter of 2022 are still looking positive. While the growth rate at which earnings ramped up post pandemic is slowing, earnings growth is still in tact albeit slower. (It is helpful to remember that earnings come out after the quarter is completed. Jan-Feb we just receive the info from Q4 2021 earnings)
Many have speculated that the market correction was due to valuation adjustments in anticipation of the Fed lifting rates. If a valuation haircut was the item the market was digesting, then at least we've already seen a significant one.
Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. No recommendation should be inferred from any information presented in this article.