Are P/E's A Problem?

Are P/E's A Problem? image

The State of the Market

There is nothing terribly new to report in terms of the current stock market drivers. Traders appear to remain focused on the state of the COVID pandemic and the economic recovery, as well as the potential for additional stimulus out of Washington D.C. In addition, we should note that stocks remain overbought on all three time-frame views (short-, intermediate-, and long-term) and investor sentiment has reached extreme levels.

This combination suggests that the table is set for some sort of pause or pullback in the near-term but that the bulls are likely to retain possession of the ball from a bigger-picture standpoint. Yet, favorable seasonality, window dressing, and FOMO could easily keep a bid under stocks through year-end. We shall see.

Some Big Picture Thoughts

During my weekend research work, I came across two charts that I thought were worth sharing. First up, is a chart showing the consensus estimates for S&P 500 operating earnings for each calendar year plotted over time.

(Click on image to enlarge)

Source: Ned Davis Research

Two things caught my eye here. First, it is interesting to note that the trend of analyst estimates is fairly consistent in most years. The estimates for the upcoming year (which usually begin to take shape in Q3 of the current calendar year) start off too high and then are adjusted lower over time. This trend is clear for calendar years 2013, 2014, 2015, 2016, 2017, and 2019.

In 2018, the trend reversed due to the Tax cuts. And then in 2020 and 2021, analysts took a hatchet to estimates in response to the economic damage caused by the COVIC shutdown.

The good news is (a) the trend of estimates for both 2020 and 2021 are now moving higher and (b) 2021 estimates are higher than 2019's. As such, it makes some sense that stock prices are higher now compared to where they were at the end of 2019.

Using this rather simplistic approach, it can be argued that the stock market isn't as "divorced from reality" as many have argued.

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should ...

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