The stock market has been hit with a lot of volatility in recent weeks. The S&P 500 tumbled 14.6% from its January 4 all-time high of 4,818.62 to a 2022 low on February 24 low of 4,114.65.
While all sorts of reasons have triggered investors’ worries, one critical metric has held firm: expected ear…
To be more precise, expected earnings have actually been trending higher this year. It’s a bullish story that’s been quietly unfolding amid a bevy of unsettling headlines in the news.
The combination of falling prices (P) and rising expected forward earnings (E) has caused the forward P/E — maybe the most popular measure of stock market value — to fall to levels we haven’t seen in a long time.
According to FactSet’s research published Friday, the forward P/E on the S&P 500 fell to 18.5.
This is below its five-year average of 18.6. The last time this metric was below that level was on April 15, 2020.This may seem difficult to process, considering the stock market’s performance so far this year and simultaneous economic and geopolitical concerns. Indeed, survey data published this week from both the University of Michigan and the Conference Board show consumer sentiment has been falling due to concerns about inflation and economic prospects.
However, the hard data suggest things in the economy are looking up. On Friday, we learned consumer spending jumped 2.1% in January, beating expectations. Core capital goods orders — a proxy for business investment — increased by 0.9% during the same period, which was also much stronger than expected. Earlier this week we learned a continuing claims for unemployment benefits fell to the lowest level since 1970, a bullish sign for employment.
Executives across corporate America have been confirming that demand has been robust and increasing their expectations for earnings growth.
Now, does an 18.5 forward P/E mean the stock market can’t go lower? Absolutely not. Stocks can swing wildly in the short run, and P/E ratios are not reliable for timing the markets.
However, we can say that the stock market has become more attractive relative to earnings, which are rising. And in the long run, earnings are the most important driver of stock prices.
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FactSet’s calculation is based on the S&P 500’s February 23 closing price of 4,225.50.