What's Wrong With This Picture?
Turn on any mainstream business channel (or President Trump’s tweet stream) and you will be told how ‘awesome’ everything is going to be… look at stocks, look at sentiment surveys, look at consumer confidence, look at small business optimism.
There is two small problems with all of this…
1) The ‘hard’ data is not confirming the ‘soft’ data at all…
Philly Fed beating by 10 standard deviations, NFIB small business optimism at record highs, but Industrial Production is dropping, real wages are shrinking, and the housing market is imploding.
And 2) Earnings Expectations are declining…
Do the analysts not pay attention to how awesome everything will be? Are the CEOs not adjusting expectations higher because of how great America is going to be again?
It appears not.
As Factset notes, the S&P 500 forward P/E is at its highest since 2004…
During the past week (on February 15), the value of the S&P 500 closed at yet another all-time high at 2349.25. As of today, the forward 12-month P/E ratio for the S&P 500 stands at 17.6, based on yesterday’s closing price (2347.22) and forward 12-month EPS estimate ($133.49). Given the high values driving the “P” in the P/E ratio, how does this 17.6 P/E ratio compare to historical averages? What is driving the increase in the P/E ratio?
The current forward 12-month P/E ratio of 17.6 is now above the four most recent historical averages: 5-year (15.2), 10-year (14.4), 15-year (15.2), and 20-year (17.2).
In fact, this week marked the first time the forward 12-month P/E has been equal to (or above) 17.6 since June 23, 2004. On that date, the closing price of the S&P 500 was 1144.06 and the forward 12-month EPS estimate was $65.14.
Back on December 31, the forward 12-month P/E ratio was 16.9. Since this date, the price of the S&P 500 has increased by 4.8% (to 2349.45 from 2238.83), while the forward 12-month EPS estimate has increased by only 0.5% (to $133.49 from $132.84).
Thus, the increase in the “P” has been the main driver of the increase in the P/E ratio to 17.6 today from 16.9 at the start of the first quarter.
It is interesting to note that analysts are projecting record-level EPS for the S&P 500 for Q2 2017 through Q4 2017. If not, the forward 12-month P/E ratio would be even higher than 17.6.
Even Factset sounds skeptical.