The brutal sell off Wall Street has endured over the last few weeks may have a silver lining.
The S&P 500 Index is currently trading at about 15 times the earnings analysts expect constituent companies to post over the next year, according to FactSet. This reading on this popular measure of valuation, known as “forward P/E,” compares to a 15-year average forward P/E ratio of 15.7.
Of course, the conclusion gleaned from a historical comparison depends on the timeframe considered. In this case, it is worth noting that the current valuation level still represents a premium to the average of 14.3 seen over the past five- and ten-year periods.
Meanwhile, and likely because the firm is using different earnings estimates, S&P Capital IQ’s current forward valuation number is 15.7, although they also note that is below the 15-year average.
However one does his or her math, there is no escaping the conclusion that by traditional metrics, stocks are cheaper now than they were in the middle of 2014; as record highs were hit in 2015; or even a few weeks ago.
Broadly speaking, what appears to have happened is that even as some investors provide a variety of economic feas or selling stocks (“The recession is nigh!”), analysts haven’t substantially reduced their earnings estimates.
That means that the numerator in the “P/E” ratio has fallen, even as the denominator remains relatively static.
Meanwhile, the first earnings to trickle in have verged on decent, as 73 percent of S&P 500 companies have beaten their earnings estimates.
Predicting the short-term fluctuations of a multifaceted and sentiment-driven market is probably a fool’s errand. But for long-term-focused investors, the question appears to be: Is the economy actually getting worse, and will earnings subsequently drop?
If their answer to that second, more important question is “no,” then increasing their allocation to stocks right now could be a decent proposition.
(A note: Some might prefer to consider a trailing earnings ratio instead, despite the fact that few investors pay today’s dollars for last years’ results, but this shows a similar result: The last-twelve months number currently shows a reading at 16.3 last-twelve-months’ earning, compared to a 15-year average of 17.7, according to numbers provided by FactSet senior earnings analyst John Butters.)