#stockmarket #MorningBrief #YahooFinance
Myles Udland, Julie Hyman, and Brian Sozzi break down the outlook on earnings growth for the market amend economic recovery.
The stock market is entering a new phase
Investors right now are faced with a simple question: how much?
How much do they want to pay for earnings growth that continues to blow away expectations but might also be peaking.
Back in early April, my Morning Brief collaborator Sam Ro highlighted the most important chart for understanding the market rally.
The chart, which came from Credit Suisse equity strategist Jonathan Golub, showed that while stock prices had been in rally mode for months, the market wasn’t getting more expensive.
And now, investors think the market might actually start getting cheaper.
Over the weekend, strategists at UBS, Morgan Stanley, and Goldman Sachs all published notes that argued valuations were likely to be flat or down in the coming months as growth slows, expenses rise, and fears over higher taxes weigh on sentiment.
Right now, the S&P 500 currently trades at roughly 22x forward earnings. You might hear this referred to as the market’s multiple or its valuation. The terms are roughly interchangeable. And we say roughly because there are always exceptions.
So a simple way of thinking about the earnings multiple for the market is how much you need to pay as an investor for $1 of earnings power. On Monday, the S&P 500 was trading at around 4,150. According to the latest data from FactSet, current earnings estimates for the S&P 500 are around $187. Divide the level of the index by the expected annual earnings for the index and you get the earnings multiple. In this case, 4,150 divided by 187 is 22.2. So for every $22.20 you put into the S&P 500, you can expect to get back $1 in earnings based on today’s estimates.
In the beginning of the current rally, the market’s earnings multiple expanded from around 18 to 22 as investors responded to lower rates and anticipated that earnings growth would be revised higher. For the last year or so, the multiple has been flat as earnings are revised higher as had been anticipated. And now, strategists think the multiple is likely to fall as we enter a new phase of the recovery.
Mid-cycle is here, and with it comes a transition from early cycle leadership,” writes Morgan Stanley equity strategist Mike Wilson in a note published Monday. “The missing piece, so far, for the mid-cycle transition — lower valuations.”
But Wilson thinks these are coming.
As bull markets transition from early-cycle recovery phases to slower growth mid-cycle periods, Wilson notes that valuations typically decline 10%-20%. A decline of this magnitude against today’s valuation backdrop could see the S&P 500’s earnings multiple fall to as low as 17x forward earnings.
“Risk premium compresses with excitement around recovery, but eventually higher rates, positioning resets, and a slowing rate of change in growth offset this and send multiples lower,” Wilson writes. “Earnings growth in a strong economy mitigates downside, but rising costs and higher corporate taxes now limit the upside. The net effect is a tug-of-war between earnings/valuation, tepid returns over the next 12 months, and a likely 10-20% correction between here and there.” Wilson has a base case S&P 500 target of 4,225 by June 2022.
Keith Parker and the equity strategy team at UBS also cautioned investors that multiples are likely to compress this year in a note published Monday. But the strength of earnings growth is likely to overwhelm this dynamic, with UBS raising its year-end S&P 500 price target to 4,400 today from 4,250.
For more on this article please visit:
https://finance.yahoo.com/news/earnings-up-multiples-down-morning-brief-100154568.html
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Would be better having ENG- subtitles
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Yeah. Good tech is getting historically cheap. I loaded the truck with AMZN, GOOGL, FB, ADBE…
The US dollar is terrorist trash.
I’ve seen the stock market close down for 3 days in a row lol.
You don’t have to be an economist to see Biden has wrecked the economy.
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@Danksey It’s obvious you’re a fan of crypto, which in my eyes, has zero value. You saw that crash this week because an ego brain tweeted support for China? When did the dollar ever lose that much value in that short of time? Inflation occurs over years not days. A person holding one BTC went from being able to purchase a BMW to a Honda in two days 😂
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@Danksey I never denied the existence of inflation, it’s real and definitely a problem. But the volatility of crypto is a bigger problem if you’re buying now.
These talking heads all spew the same nonsense. This bubble will burst soon—buy SPY and QQQ puts now!!!
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I have “Burry Worry” He doesn’t like ETF’s, thinks banks are in trouble. What to do. Park it and see what is next?
S&P’s PE is higher than its been since 2008. Its bound to come down at some point
Maybe…but where do you put your money? Real Estate is over valued also. You don’t get any type of return saving in the bank. Crypto is unknown and it’s huge rise and drop is not for the feint of heart. Plus 99% of people that “invests” in crypto have no idea what they’re investing in. Most are speculators more than investors.
Just go total market index fund and stop over thinking it.
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Critics will point out that βͲc is way too volatile to be a store of value. That’s a short-term view of the concept, however. Over the next week, month, perhaps even year, βͲc pr!ce may fall relative to fiat currcncies. Lonnger term, however, in an environment of money supply increasing much faster than demand, a fixed-supply bearrer asset such as βͲc is likely to apprieciate in value relative to assets without a supply, I wept deeply and prayed after the last time i had much L0SS, my Uncle introduced me to an Expt. Daniel who I started tradln with since late last year,I’ve covered up and made over 21 B T С with 5 B T C even with the ups and downs since the journey. With Daniel’s counsel I no longer have to worry about the rise and dip ofBitcoin. For prof!table tradlng guidiance, You can easily get to him :TєIєɠram @danielwrightfx”’
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Why is everyone talking about IT Tech Packaging Inc. ITP ?? Isn’t that the inexpensive stock that Warren Buffet was adding to his repertoire?? Oh gotta go catch my flight ✈️ bye 👋 Anyway!! Anyone who knows more let me know thanks guys.
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Bitcoin is over $56,000 and counting investing in it now is a very lucrative way of making profits, sleep on it, don’t just buy and hold bitcoin. Trade it