Pressured Profits Might Add Fuel To Market Rally

Pressured Profits Might Add Fuel To Market Rally

over 3 years ago1 min

Mentioned in story

The outlook for company earnings can’t get any worse – and that might be a good sign for stock markets.

What does this mean?

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.

Is the black line bottoming?
Is the black line bottoming?

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.

Why should I care?

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.

(Source: Goldman Sachs)
(Source: Goldman Sachs)

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...

(Source: Yardeni Research)
(Source: Yardeni Research)
Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG