S&P 500’S Frothy Valuation
By Monday’s open, the S&P 500’s price-to-earnings (P/E) ratio had reached 23.00. In other words, the index is trading at 23 times forward earnings–the highest since mid-2001.
The P/E ratio measures a company’s current share price relative to its per-share earnings. A high P/E often means that a market’s current price is not justified by its earnings outlook.
The elevated P/E comes even as many corporations revised or pulled their forward guidance due to the pandemic. As of Friday, 27 S&P 500 companies had issued negative earnings guidance for Q2 compared with 21 that issued positive guidance.
An ‘Uncomfortable’ Rally
Stocks have rebounded more than 43% from their March lows thanks to unprecedented Federal Reserve intervention and optimism about a broad economic resurgence. The bulls were vindicated on Friday after the Labor Department reported a net gain of 2.5 million jobs in May.
As the S&P 500 inches closer to record highs, Allianz’s Mohamed El-Erian says the rally is making him “uncomfortable.”
The economist, who correctly predicted the pandemic-driven bear market, told CNBC:
For me personally, it’s an uncomfortable bet to continue to bet on a huge recovery… I don’t like doing this. But I respect and admire those who can.
Despite their ‘win-win’ attitude, investors are failing to consider the long-term impact of Fed intervention in the market.
- Source, CCN
