High P/E Market Valuations Misleading Trump’s Chumps

Investment Market Commentary

Comments will be somewhat brief as I have supplemented Thursday’s report with charts and data. Today I will address the high P/E market valuations, which I believe may be misleading US stock investors into being Trump’s chumps. First, here is a nutshell summary of market moving events:

  • Employment: Initial Jobless Claims dipped another 10k this week to 258k vs. previous @ 268k and estimates @ 255k. The 4-week moving average, more importantly, historically low @ 252.5k.
  • Central Banks / Europe: The ECB will reduce its asset buying program to €60 billion vs. €80 billion per month as of April 2017. However, President Draghi reassured the markets that he would expand or extend QE beyond December 2017 if necessary or if inflation targets are not within range.
  • Interest Rates / FedWatch Tool: The CME Group’s indicator is assigning a 97% probability of a Federal Reserve rate hike this December.

Either because or in spite of the above, stocks continued rallying to new highs. The SP-500 (SPY), Dow-30 Industrials (DIA) and Russell-2000 (IWM) reached new record levels while the Nasdaq-100 (QQQ) moves closer to challenging its own all-time high. For a reality check, here is a P/E data table I have created based on data sourced from Birinyi Associates. 

Market P/E Valuations

Index Current TTM P/E Last Yr TTM P/E Forward Est. P/E
SP-500 24.22 22.71 18.41
Dow-30 Industrials 21.40 16.87 18.02
Nasdaq-100 23.45 22.95 18.96
Russell-2000 nil 144.68 19.38

For added measure, I have provided a chart of the SP-500’s historical P/E ratios. The graph below shows market valuations at extreme levels and vulnerable to a potential contraction. There are essentially two ways for this to occur: 1) the market corrects in price with a sell-off; or 2) earnings growth occurs at a rate that is faster than market appreciation or the market stalls in price advances while earnings growth aids in the compression of the P/E multiple. (I’ll let you decide how this one ends.)

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Chee Hin Teh 3 years ago Member's comment

thanks for sharing