Are Investor Worries Warranted Now?

This week’s latest data is out from and shows that earnings, at least for this week, have stabilized, falling only slightly versus last week. Forecasts for 2018 now stand at $151.55 versus $151.60 last week. The earnings for 2019 have dropped to $166.00 from $166.06, while 2020 have fallen to $187.33 from $187.40.

(Dow Jones S&P)

Given all the revisions, growth rates have changed fairly materially over the past few weeks. Growth in 2019 is now forecast to rise by about 9.5%, up from prior estimates of around 7.6%. Meanwhile, 2020 earnings growth is forecast to increase by 12.85%, down from 13.25%.

eps growth rates

eps growth rates

(Data from Dow Jones S&P)

The PE ratio for 2019 dropped this week to 16.5, while the 2020 PE ratio dropped to 14.64.

(Data from Dow Jones S&P)

Better Growth, Low Multiple

What I find most interesting about the current market environment is that investors appear to be paying a below average price for what is expected to be above average earnings growth.

Since 1988 the has averaged a trailing-twelve-month PE ratio of 20.3, a current P/E ratio of 18.8, and next-twelve-month PE ratio of 17.7. Currently, the S&P 500, we find that the TTM PE ratio is 20.7, the current PE ratio of 18, the NTM PE ratio is 14.6. What we learn through this example, is that S&P 500 from a current PE and TTM PE ratio is fairly valued, but is well below the historical on a forward basis.

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