Stock Prices Keep Going Up, Even Though Growth Expectations Are Down

Stock prices are going up as earnings growth expectations are going down.  That is often an early indicator of an impending correction.


131117 Here-is-a-sign-that-stock-market-investors-are-totally-nuts

via Busines Insider.

This phenomenon of prices rising faster than earnings is referred to as multiples expansion. In other words, valuations are rising as reflected by an increasing price-earnings ratio. However, price-earnings ratios are drifting farther and farther away from their long-term averages, causing some market watchers to warn that we are in a bubble.

According to FactSet, The forward 12-month P/E ratio for the S&P 500 now stands at 15. This is the highest forward 12-month P/E ratio logged by the S&P 500 in more than four years (September 2009).

Given the high values driving the “P” in the P/E ratio, how does this 15.0 P/E ratio compare to historical averages? Is the index now overvalued?

On one hand, the index is now trading above both the 5-year (13) and 10-year (14) average P/E ratios. On the other hand, it is still trading below the 15-year average P/E ratio (16.2), and is not close to the peak P/E ratio of 25 recorded in the late 1990’s and early 2000’s.

Stock market bears looking for a sell-off are waiting incredulously ; price is the primary indicator (and it is still implying that there are more buyers than sellers).

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