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Give It Time

Mike Zaccardi

WHILE THE S&P 500’s price-earnings (P/E) ratio has little predictive power if you look at returns over the next 12 months, it’s more important if you stretch out your time horizon to five years and beyond. What you pay has a significant impact on your likely long-run return—and that should be comforting for today’s buyers.

Recently, WisdomTree Global Chief Investment Officer Jeremy Schwartz shared a compelling graphic showing P/E ratios for dozens of U.S. and foreign stock market sectors. Whether you look at broad market segments or only at value stocks, it’s hard to find a hugely expensive part of the global market. For instance, WisdomTree shows a P/E based on forecasted earnings of just 13.8 for the Russell 3000 Value Index, a broad gauge of the U.S. stock market that excludes growth companies.

Morningstar concurs that markets look cheap. As of Aug. 31, the research firm boldly declared that all nine of the Morningstar “style boxes” were in undervalued territory. Its fair value estimate is based on a composite of some 700 individual stocks.

This is far different from the P/E picture at year-end 2020. Back then, according to FactSet, the S&P 500’s P/E ratio based on trailing 12-month earnings seemed stretched at around 31 times corporate profits. But as of this past Friday, large-cap U.S. stocks were trading below 20 times earnings—and below both their five- and 10-year averages. It’s reasonable to conclude that stocks are a good value today based on both trailing and forecasted earnings.

The bottom line: Rising corporate profits, increasing dividends and share buybacks, and the simple passage of time will eventually heal all stock market wounds. The longer the market trades sideways to down, the more compelling the valuation picture becomes—and the higher future returns will likely be.

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T. V. NARAYANAN
T. V. NARAYANAN
14 days ago

Biden’s so called and misnamed inflation reduction act will impose a 1% tax on stock buybacks. This will do some harm to stock investment.

Boomerst3
Boomerst3
11 days ago

Nope. This is good for investors. Why do some hate paying their fair share? They use the services, but hate paying for them

Derek R. Austin
Derek R. Austin
14 days ago

And will slightly tax people who pay nearly no taxes. Probably a good thing

David Powell
David Powell
15 days ago

US markets look closer to fairly valued but not yet what I would call cheap by most measures.

David Powell
David Powell
15 days ago
Reply to  David Powell
Richard Gore
Richard Gore
16 days ago

As the saying goes, it is hard to catch a falling knife. I will say it again: stick with your plan.

If you are interested in a different perspective check out Palm Valley Capital Management. I’m not saying that one or the other is right, but it may be worthwhile think of a whole range of possible outcomes.

Ormode
Ormode
16 days ago

I am quite surprised that utilities are still expensive; they should be more sensitive to interest rates. SO, 27 times earnings, DUK, 21 times earnings, ED, 21 times earnings, EXC, 24 times earnings. When interest rates were only slightly higher in the early 2000s, companies like these sold for 12-14 times trailing earnings.

Derek R. Austin
Derek R. Austin
14 days ago
Reply to  Ormode

Utilities are traditionally value stocks, and the value premium traditionally comes from less drawdowns compared to pricey growth stocks.

Guest
Guest
16 days ago

While I’m no market timer I hesitate to view the market as undervalued yet as I suspect the forecasted “E” will fall and the market along with the, then, higher P/E. Naturally I hope I’m wrong.

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