Wednesday, May 6, 2020

The Lofty Stock Market

One of the few bits of good financial news we've gotten in recent weeks has been the recovery of the stock market. Here's the downside of that: U.S. stocks are trading at pricier valuations relative to corporate profits than at any point since the dot-com bubble in 2000.

As S&P 500 index firms continue to report first-quarter earnings, managements have often declined to provide guidance on future performance, given the uncertainty the coronavirus pandemic has created. Such an environment has allowed the large-cap index to trade at more than 22 times expected 12-month earnings, a level not seen in roughly 20 years, according to FactSet.

RBC Capital Markets predicts 2021 earnings will ultimately come in at $153 per share for the S&P 500. At $153 per share, that would leave the S&P 500 trading at roughly 18.8 times 2021 earnings, well above the five-year average of 16.7 and the ten-year average of 15.

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