Put the P/E ratio in timeout for now 🙈
Plus a charted review of the macro crosscurrents 🔀
📈 The stock market rallied last week, with the S&P 500 climbing 5.7% to close at 5,363.36. It’s now down 12.7% from its February 19 closing high of 6,144.15 and up 49.9% from its October 12, 2022 closing low of 3,577.03. For more on market moves, read: Investing in the stock market is an unpleasant process 📉
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The forward price-earnings (P/E) multiple has limited value during normal times.
And the metric arguably has even less value during periods of elevated uncertainty.
That’s because the E is based on analysts’ estimates for the near future. And when the outlook for business is increasingly uncertain and rapidly changing, it can take time for many analysts to adjust that E.
This is especially the case right now as many companies have not yet factored the impact of tariffs into their guidance, which analysts lean on when they establish their earnings forecasts.
“We've been reading earnings call and conference transcripts closely since November across market capitalizations, sectors, and industries and feel fairly confident in saying that U.S. public companies have been very reluctant to discuss tariff impacts (outside of China) until specific details have been provided by the administration, and even then, many still have not given sell-side analysts a lot of specifics to start factoring into their models,“ RBC’s Lori Calvasina wrote earlier this month.
Assuming tariffs are negative for earnings — which is what everyone assumes — this means the E is being distorted higher by stale estimates.
With stock prices falling the way that they have been in recent weeks, the P/E ratio could be creating the illusion that stocks have gotten cheaper than they are in reality.
Generally speaking, it’s not a great idea to be trading in and out of the stock market, especially during periods of stress. It’s especially treacherous to be trading based on P/E ratios, more so when the Es are unreliable.
Unfortunately, we might not get a clean E any time soon.
“There is a reasonable probability that absent some resolution/clarity, transparency could be compromised,” BofA’s Savita Subramanian wrote on Thursday. “Companies tend to shut down guidance amid uncertainty.”
This sentiment is in line with Goldman Sachs’ David Kostin, who expects “during upcoming quarterly earnings calls fewer companies than usual will provide forward guidance.“ This is because recently announced tariffs have made it very difficult to project where business is headed.
If you’re going to trade, be careful about trading based on expectations for the near future. The savviest minds in the market caution this is a guessing game.
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Keep current with a paid TKer subscription! Here’s what went out to paid subscribers in recent weeks:
The unsettling update we should brace for during earnings season 😬
Anti-American sentiment is bad for the American brand abroad 🇺🇸
Mean reversion in the stock market is an 'optical illusion' 😵💫
Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
👍 Inflation cools. The Consumer Price Index (CPI) in March was up 2.4% from a year ago, down from the 2.8% rate in February. Adjusted for food and energy prices, core CPI was up 2.8%, down from the prior month’s 3.1% level.
On a month-over-month basis, CPI fell 0.1% amid lower energy prices. Core CPI was up just 0.1%. If you annualize the three-month trend in the monthly figures — a reflection of the short-term trend in prices — core CPI climbed 3.0%.
For more on inflation, read: The end of the inflation crisis 🎈and The Fed closes a chapter with a rate cut ✂️
⛽️ Gas prices tick lower. From AAA: “Prices at the pump are coming down even though this is the time of year when gas prices go up. Supply and demand are the main reason for the dip. After OPEC+ announced it’s increasing oil production next month by more than 400,000 barrels a day – much more than expected – the price of crude oil has been falling. Oversupply coupled with tepid gasoline demand is resulting in lower pump prices.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
💼 Unemployment claims tick higher. Initial claims for unemployment benefits increased to 223,000 during the week ending April 5, up from 219,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more context, read: A note about federal layoffs 🏛️ and The labor market is cooling 💼
👎 Consumer vibes tumble. From the University of Michigan’s April Surveys of Consumers: “Consumer sentiment fell for the fourth straight month, plunging 11% from March. This decline was, like the last month’s, pervasive and unanimous across age, income, education, geographic region, and political affiliation. Sentiment has now lost more than 30% since December 2024 amid growing worries about trade war developments that have oscillated over the course of the year. Consumers report multiple warning signs that raise the risk of recession: expectations for business conditions, personal finances, incomes, inflation, and labor markets all continued to deteriorate this month.”
Politics clearly plays a role in peoples’ perception of the economy:
Notably, expectations for inflation appear to be a partisan matter. From Bloomberg’s Michael McDonough: “Democrats' inflation expectations continue to rise (7.9%), while Republicans' expectations, though still much lower (0.9%), are trending upward. Trend suggests some bipartisan agreement that tariffs may be inflationary. Independents are moving with Democrats.“
For more on sentiment, read: Beware how your politics distort how you perceive economic realities 😵💫
👎 Small business optimism falls. From the NFIB’s March Small Business Optimism Index report: “This year will be one ruled by uncertainty. Global and domestic actions are generating insecurities in abundance, both political and economic. President Trump’s administration is rearranging the deck chairs at a record pace...”
For more on the state of sentiment, read: Beware how your politics distort how you perceive economic realities 😵💫
Notably, the more tangible “hard” components of the index continue to hold up relatively well.
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
💳 Card spending data is holding up. From JPMorgan: “As of 01 Apr 2025, our Chase Consumer Card spending data (unadjusted) was 4.7% above the same day last year. Based on the Chase Consumer Card data through 01 Apr 2025, our estimate of the US Census March control measure of retail sales m/m is 0.40%.”
From BofA: “March card spending per household was up 1.1% year-over-year (YoY), according to Bank of America aggregated credit and debit card data. Seasonally-adjusted card spending per household rose 0.2% month-over-month (MoM).“
For more on the consumer, read: Americans have money, and they're spending it 🛍️
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.62% from 6.64% last week. From Freddie Mac: “The average 30-year fixed-rate mortgage continues to trend down, remaining under 7% for the twelfth consecutive week. As purchase applications continue to climb, the spring homebuying season is shaping up to look more favorable than last year.”
There are 147.4 million housing units in the U.S., of which 86.9 million are owner-occupied and about 34.1 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 63.5% on Tuesday last week, down one tenth of a point from the previous week and half a point from its record high in February. Los Angeles set a new single-day record high of 57.2% on Wednesday. Occupancy in Washington, D.C. peaked on Tuesday at 62.9%, up 1.5 points from the previous week and only two tenths of a point lower than its record high set in March.”
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
🇺🇸 Most U.S. states are still growing. From the Philly Fed’s February State Coincident Indexes report: "Over the past three months, the indexes increased in 45 states, decreased in three states, and remained stable in two, for a three-month diffusion index of 84. Additionally, in the past month, the indexes increased in 38 states, decreased in six states, and remained stable in six, for a one-month diffusion index of 64.”
📉 Near-term GDP growth estimates are tracking negative. The Atlanta Fed’s GDPNow model sees real GDP growth declining at a 2.4% rate in Q1. Adjusted for the impact of gold imports and exports, they see GDP falling at a 0.3% rate.
For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and You call this a recession? 🤨
Putting it all together 🤔
🚨 The tariffs announced by President Trump as they stand threaten to upend global trade — with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get some more clarity, here’s where things stand:
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 65% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2024. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 85% underperformed. Over a 10-year period, 90% underperformed. And over a 20-year period, 92% underperformed. This 2023 performance follows 14 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
