June 26th, 2020
Stocks currently look expensive by at least one measure: valuations. The S&P 500’s forward price-to-earnings ratio has rebounded in recent weeks, and is not far off the highs it hit at the peak of the dot-com bubble. But that could change very quickly with the start of the second quarter earnings season the week after next. Why? Typically, price-to-earnings ratios are priced over 12-month forward earnings. So right now, they are comparing Q1 earnings this year vs. Q1 next year. But once Q2 earnings are out (and Q2 is expected to be the trough this year), 12-month forward earnings will reflect Q2/Q2 - a much steeper earnings growth comparison - which will reduce the ratio in lockstep, lessening worries about headline overvaluation at least.
Chart by Ritvik Carvalho and commentary by Mike Dolan
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