Saturday, February 21, 2015 5:11:18 PM
The S&P 500 hasn’t been this highly valued in more than a decade
The index’s forward 12-month P/E ratio is at 17.1, its highest level since December 2014
So far, fourth-quarter earnings haven’t shined. Lackluster corporate results have managed to temper expectations for S&P 500 companies, threatening to take some of the air out of the market.
By Anora Mahmudova
NEW YORK (MarketWatch) — So far, fourth-quarter earnings haven’t shined. Lackluster corporate results have managed to temper expectations for the S&P 500 companies, threatening to take some of the air out of the market.
Stocks, however, haven’t flinched. In fact, the S&P 500 and the Dow Jones Industrial Average hit fresh records Friday, inflating already lofty valuations.
According to FactSet, the 12-month forward price-to-earnings ratio on the S&P 500 has moved above 17 to its highest level since Dec. 31, 2004. Meaning, investors are willing to pay a multiple of 17 times next year’s projected earnings. And it isn’t as if stocks were cheap to start.
At the end of last year, forward P/E was 16.2. Since then, the ratio has expanded because prices have risen by about 2.5% while earnings estimates fell by more than 3%.
To be sure, high P/E ratios aren’t good predictors of pullbacks or crashes. But when stocks are overvalued, they tend to suffer sharper falls when corrections do happen. Think of it as piling on building blocks, higher and higher, until they come crashing down. It is no wonder that a few hedge fund heavyweights are dumping stocks (It is worth noting that even those who are said to be getting out of stocks may only be cutting exposures to stocks through, say, equity funds).
David Tepper took ax to U.S. stockholdings in 2014
It appears that investors are pouring money into stocks because of lack of alternatives. That may not end well, cautions Kim Forrest, senior investment strategist at Fort Pitt Capital.
“[P/E] multiples are expanding because interest rates and inflation are falling. But just as disinflation, driven by oil plunge, is temporary, multiple expansion will end at some point too,” Forrest said. In other words, it may not be long until it all comes crashing down.
It may be prudent for investors to adjust their portfolios accordingly and follow Tepper’s lead in 2015.
The index’s forward 12-month P/E ratio is at 17.1, its highest level since December 2014
So far, fourth-quarter earnings haven’t shined. Lackluster corporate results have managed to temper expectations for S&P 500 companies, threatening to take some of the air out of the market.
By Anora Mahmudova
NEW YORK (MarketWatch) — So far, fourth-quarter earnings haven’t shined. Lackluster corporate results have managed to temper expectations for the S&P 500 companies, threatening to take some of the air out of the market.
Stocks, however, haven’t flinched. In fact, the S&P 500 and the Dow Jones Industrial Average hit fresh records Friday, inflating already lofty valuations.
According to FactSet, the 12-month forward price-to-earnings ratio on the S&P 500 has moved above 17 to its highest level since Dec. 31, 2004. Meaning, investors are willing to pay a multiple of 17 times next year’s projected earnings. And it isn’t as if stocks were cheap to start.
At the end of last year, forward P/E was 16.2. Since then, the ratio has expanded because prices have risen by about 2.5% while earnings estimates fell by more than 3%.
To be sure, high P/E ratios aren’t good predictors of pullbacks or crashes. But when stocks are overvalued, they tend to suffer sharper falls when corrections do happen. Think of it as piling on building blocks, higher and higher, until they come crashing down. It is no wonder that a few hedge fund heavyweights are dumping stocks (It is worth noting that even those who are said to be getting out of stocks may only be cutting exposures to stocks through, say, equity funds).
David Tepper took ax to U.S. stockholdings in 2014
It appears that investors are pouring money into stocks because of lack of alternatives. That may not end well, cautions Kim Forrest, senior investment strategist at Fort Pitt Capital.
“[P/E] multiples are expanding because interest rates and inflation are falling. But just as disinflation, driven by oil plunge, is temporary, multiple expansion will end at some point too,” Forrest said. In other words, it may not be long until it all comes crashing down.
It may be prudent for investors to adjust their portfolios accordingly and follow Tepper’s lead in 2015.
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