LIVE MARKETS-Fixating on valuations

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FIXATING ON VALUATIONS

U.S. stocks are once again highly valued when looking at history as price-to-earnings ratios are above long-term averages, but that doesn't necessarily mean that equities are "too expensive", according to Fisher Investments.

"Valuations aren't a forecasting easy button," Fisher Investments says.

"A sober review of history proves they tell you very little about where markets are headed."

The S&P 500 currently trades at about 22x forward earnings, above its 10-year average of around 18.6x.

While forward P/Es are, as the name suggests, forward-looking, Fisher Investments notes that they also have backward-looking aspects given that analyst expectations tend to reflect prevailing sentiment.

"If dour, as after a correction, analysts tend to lower earnings estimates, potentially skewing the valuation even higher," Fisher says.

The wealth manager has taken a look at bear markets over the last 30 years and found varying levels and trends.

Before the 2000-2002 bear market, the forward P/E for the S&P 500 was above average and rising, but it was below average and falling before the 2007-2009 bear market.

In the COVID bear market of 2020, the forward P/E was above average, but it was falling leading to the 2022 bear market.

"To us, this speaks to forward P/Es’ unreliability as an indicator," Fisher says.

(Samuel Indyk)

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