The internal correction had a more significant impact in depressing valuation multiples than did the EM crisis and the Crimean incident. That’s because the correction wasn’t triggered by any macro event, but was all about money moving out of high-P/E stocks into low-P/E stocks. As a result, the forward P/E for the S&P 600 SmallCaps dropped from 19.3 on March 18 to 17.6 on May 15. It has edged back up to 17.9.
The forward P/E correction for the S&P 400 MidCaps occurred from March 4 through May 20 as it fell from 17.7 to 16.7. It is back up to 17.0. The forward P/E of the S&P 500 declined less than the other two and over a shorter time period (just 8 days!), from 15.5 to 14.8 from April 3 to April 11. It is back up to 15.3.
While valuation multiples were undergoing this internal correction, forward earnings for all three S&P market capitalization composites continued to rise to new record highs. Indeed, the pace of the ascent in the S&P 500 and S&P 400 has actually risen in recent weeks. Annual earnings estimates for 2014 and 2015, which had been falling last year and early this year, have picked up recently.
I am heartened to see that analysts seem to be getting more upbeat about earnings. Apparently, so are investors, as the stock market continues to grind higher in the face of valuation multiples that remain relatively high. I would like to see stock prices continue to grind higher along with earnings.
Today's Morning Briefing: Grinding Higher. (1) Complacency is worrying the Fed according to Hilsenrath. (2) Anatomy of corrections and bear markets. (3) Is the internal correction over already? (4) Forward earnings continue to grind higher. (5) Analysts’ upbeat earnings feeding investors’ complacency. (6) NIPA profits dropped during Q1, but should grind higher too. (7) Cash flow moving sideways in record territory. (8) Focus on market-weight-rated S&P 500 Auto industry.
