Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

Stock Valuations Do Not Matter… Until They Do

By Gary GordonStock MarketsSep 23, 2022 02:55AM ET
www.investing.com/analysis/stock-valuations-do-not-matter-until-they-do-200630210
Stock Valuations Do Not Matter… Until They Do
By Gary Gordon   |  Sep 23, 2022 02:55AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
US500
+2.59%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

Those who refuse to give up the idea that the stock bubble has burst, or refuse to consider that the market will drop further, ignore stock valuations.

Consider the popular earnings-based and book-based metrics. In what world has the 21% decline from the top provided S&P 500 index bargains?

Valuations
Valuations

If you bring regression-to-the-mean analysis to the bearish party, or the Q ratio, or even market-cap-to-GDP, the selling may be in the earlier innings.

Average Of 4 Valuation Indicators
Average Of 4 Valuation Indicators

A number of inquirers asked me whether or not inflation can play a role. Indeed, it can. There is the “Rule of 20.”

This particular metric identifies “fair value” at a point where the Forward 12 month P/E combines with the year-over-year change in the consumer price index (CPI). Fair value is when the sum is 20.

It is easy to see that, until 2022, we had been living in a make-believe world not unlike the dot-com disaster in 2000. Clearly, there’s room for stocks to fall.

SP 500 Forward P/E + CPI Y/Y
SP 500 Forward P/E + CPI Y/Y

There’s more. Primarily, the Forward P/E is not static.

In essence, the “E” in the forward P/E should be declining as it is overstated in a weakening economic backdrop. That will make the Forward P/E even pricier.

To wit, the chart below has yet to account for the year-over-year earnings growth to turn negative. That is what happens in every recession. And there’s very few folks out there who see any path for the Fed to avoid a recession, whether it turns out mild or harsh.

SP 500 Earning Growth Y/Y
SP 500 Earning Growth Y/Y

Remember, the first two quarters of 2022 served up negative GDP. That alone marks a technical recession.

Will the 3rd and 4th quarter improve markedly? Maybe. Perhaps the U.S will avoid a negative GDP print in Q3.

Nevertheless, the projections are hardly looking good. The latest GDP Now tracker projects an economy teetering on a 3rd consecutive quarter of economic heartache.

Atlanta Fed GDP Estimates
Atlanta Fed GDP Estimates

Stock Valuations Do Not Matter… Until They Do
 

Related Articles

Mike Zaccardi, CFA, CMT
What Will the 'E' Be? By Mike Zaccardi, CFA, CMT - Oct 04, 2022

Investors are concerned about futures S&P 500 earnings A decent P/E valuation today might actually be quite pricey if estimates retreat Data show earnings recessions can last...

Stock Valuations Do Not Matter… Until They Do

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
JOT CG
JOT CG Sep 23, 2022 6:58AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Nice insight, thanks
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email