Equity valuations rebound

Bleak earnings remain a wild card

NEW YORK — The sharp rebound in equities has pushed widely used measures of valuing U.S. shares to their highest level in years.

Strategists say price-toearnings ratios could go higher still given monetary stimulus, but huge uncertainty around earnings this year because of the economic fallout from the coronavirus makes for challenges in valuing shares.

Stock prices have risen even as earnings estimates have fallen, lifting multiples that were knocked down in the virus-driven market meltdown. The S&P 500 has recovered more than 25 per cent from its March low following a raft of global stimulus and, more recently, after COVID19 infections showed signs of peaking in parts of the United States.

The S&P 500’s P/E ratio, based on earnings estimates for the next four quarters, is now at 20.1, the highest in at least 15 years, according to IBES data from Refinitiv as of Friday. That’s up from about 14 just last month.

The forward P/E for Europe’s STOXX 600 is at 14.6, not far from the 15.3 level it reached on Feb. 26, and well above its recent low of 11.1 in March, based on Refinitiv’s data.

Meanwhile, analysts expect earnings for S&P 500 companies to drop 17.9 per cent in 2020 from the previous year, the IBES data shows.

That is much steeper than the 3.5 per cent decline estimated at the start of the month.

“In certain cases, the valuations are not necessarily showing the true picture,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

First-quarter earnings for S&P 500 companies are expected to have declined 14.8 per cent from the year-ago quarter, while second-quarter earnings are forecast to fall 33.3 per cent.

Analysts’ earnings expectations could fall further, giving investors further reason to question current multiples.

Strategists see problems with European equity valuations as well.

“The P may be a little bit higher but not too stretched,” said Michael Bell, global market strategist at J.P. Morgan Asset Management.

“It’s more that, it’s that the E is probably too optimistic.”