Even as stock prices fell, the earnings half of the P/E equation remained relatively stable. Now that Wall Street analysts are cutting earnings forecasts at a faster-than-usual pace, some investors are bracing for another period of stock market volatility, a media report said.
“It’s hard for us to say the market is cheap,” said Rob Howarth, senior investment strategist at US Bank. “We haven’t seen the end of the earnings reset yet.”
The bottom-line estimate of third-quarter earnings per share, a composite of consensus estimates for individual companies in the S&P 500, fell 2.5% in July, according to FactSet. That was the biggest decline in the first month of a quarter in more than two years and a bigger drop than the historical average, the Wall Street Journal reported.
The market valuation is also rising again. After falling from highs earlier in the year, the S&P 500 is trading at 17.5 times expected earnings over the next 12 months, up from 15.3 in mid-June and slightly above its 10-year average.
“It’s not just about the fundamentals or the growth, but what you pay for them is ultimately what matters,” said Ronald Saba, senior portfolio manager at Horizon Investments. “Valuations will matter increasingly, especially in a slowing growth environment,” reports the Wall Street Journal.
Next week, investors await consumer price and producer price reports for the latest inflation data.
Recent data releases and corporate earnings reports have given mixed signals about the trajectory of the economy and whether a recession is on the horizon. Gross domestic product contracted for two straight quarters, but Friday’s robust jobs report showed unemployment remained low and the economy was adding jobs at a steady pace.
Expectations for corporate earnings are falling. That means the stock market is once again at risk of looking expensive even after this year’s decline, the Wall Street Journal reported.
Wall Street often uses the ratio of a company’s stock price to its earnings as an indicator of whether a stock looks cheap or overvalued. By that measure, the market as a whole has been particularly expensive for much of the past two years, when easy monetary policy has shot major stock indexes to dozens of new highs.
That environment is gone. Concerns about inflation and the Federal Reserve’s rate hike path have roiled markets, along with the debate over the appropriate value of stocks. The S&P 500 has fallen 13 percent in 2022, despite rising 13 percent since mid-June, the Wall Street Journal reported.
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