Even as stock prices fell, the earnings half of the P/E equation remained relatively resilient. Now that Wall Street analysts are cutting earnings estimates faster than usual, some investors are bracing for further stock market volatility, a media report said.
“We have a hard time saying the market is cheap,” said Rob Haworth, senior investment strategist at US Bank. “We haven’t seen the end of retained earnings yet.”
The bottom-up estimate of third-quarter earnings per share, a sum of consensus forecasts for individual companies in the S&P 500, fell 2.5 percent in July, according to FactSet. That’s the biggest drop in the first month of a quarter in more than two years and a larger drop than the historical average, the Wall Street Journal reported.
The valuation of the market is also rising again. After slipping from high levels earlier in the year, the S&P 500 is trading at 17.5 times forward 12-month forward earnings, up from 15.3 in mid-June and slightly above its 10-year moving average.
“It’s not just about fundamentals or growth, it’s what you pay for it that ultimately matters,” said Ronald Saba, senior portfolio manager at Horizon Investments. “Valuations are becoming increasingly important, especially in a slowing growth environment,” reported the Wall Street Journal.
In the coming week, investors are awaiting consumer and producer price reports for the latest inflation data.
Recent data releases and corporate earnings reports have sent mixed signals about the course of the economy and whether a recession is imminent. Gross domestic product has contracted for two consecutive quarters, but Friday’s robust jobs report showed unemployment remains low and the economy is adding jobs at a healthy pace.
Corporate profit expectations are falling. That means the stock market is again in danger of looking expensive even after this year’s plunge, the Wall Street Journal reported.
Wall Street often uses the ratio of a company’s stock price to its earnings as a measure of whether a stock appears cheap or overpriced. On that metric, the market as a whole has been particularly expensive for much of the past two years, as loose monetary policy pushed major stock indexes to dozens of new highs.
This environment has disappeared. Concerns about inflation and the trajectory of US Federal Reserve rate hikes have caused turmoil in the markets, along with debates about the fair value of equities. The S&P 500 is down 13 percent in 2022, despite being up 13 percent since mid-June, the Wall Street Journal reported.
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