How Can Valuations Decline Despite A Rising Stock Market?
Published on: 09/28/2021
In this edition of Chart Talk, Tony Ogorek and Jeff Viksjo look at the price-to-earnings for the S&P 500 to explain how valuations are declining despite a rising stock market.
Welcome to another edition of Chart Talk. I’m Tony Ogorek and I’m here with Portfolio Manager, Jeff Viksjo. And you know, Jeff, it’s really interesting, any numbers we look at for companies, company valuations, you name it, all tend to be contingent on context. In other words, what the belief is that the market, or analysts have, about what pricing should be today, and most importantly, what they think it’s going to be like in the future. We’re all humans, we’re all subject to emotional swings, sometimes they overshoot on the upside and they overshoot on the downside. But, I think the chart we’ve got today is really sort of interesting in terms of maybe what an overshoot of pessimism was like at the beginning of COVID. So, what do you see here, Jeff?
Yea Tony, so, the S&P 500 is up 35% over the last year. So, it’s natural to think that stocks have become more expensive over the last year. But this chart is really surprising. It shows the price-to-earnings ratio for the S&P 500; so how much you’re paying for every dollar of earnings. You can see it’s going down over the last year. How does this make sense? Obviously, prices are going up, but earnings are going up faster. This is because companies have managed inflation very, very well, corporate profit margins are at 10-year highs, and they’ve managed COVID very well. Demand has been strong.
Right. So, the interesting thing I think people need to understand is, you cannot look at one number and make a judgement on it out of context. And the context that we’re taking a look at here is the fact that we do have rising prices, but we do, as you indicated, have even faster rising profits. And because of that, the valuations; what you’re paying for a dollar of earnings, actually has decreased over time.
Interesting insight, hopefully you learned a little bit here, and we look forward to seeing you at our next Chart Talk.