over 3 years ago • 1 min
The outlook for company earnings can’t get any worse – and that might be a good sign for stock markets.
All year, analysts have been cutting their profit estimates for companies in the S&P 500 index – starting off slowly then picking up speed as the coronavirus spread around the world. But data from Factset released this week suggests the cuts might be about to stop. The trend has even pushed Fidelity to ponder if analysts will start increasing their projections once more.
The price of stock markets compared to the underlying companies’ expected profits is one of the key numbers investors look at before deciding whether to buy. And plenty have worried that – with a price-to-earnings (P/E) ratio of about 22 – the S&P 500 looks historically expensive. Especially considering the economic and social turmoil currently convulsing America, not to mention COVID.
If analysts have indeed stopped cutting their profit projections, that means the E part of the P/E equation is only likely to grow – making stocks look more attractively valued. And, as Goldman Sachs pointed out recently, company profits have rebounded quickly from past economic crises. Earnings fell by a median average of 13% during post-war recessions, but bounced back by 15% over the following four quarters.
In addition, many professional money managers aren’t allowed to sit on cash: they have to allocate funds between stocks, bonds, and other investments. And if you think stocks look expensive, just wait until you see what bond market valuations look like...
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