Tackle Today: Stocks have Gotten Cheaper This Year
August 17, 2021
≈Here’s How ≈
Traders,
The S&P 500 is up nearly 20% on the year and quickly closing in on $4,500. With prices having risen so far, you might be wondering how anyone could make the case that stocks have actually gotten cheaper this year.
Have we entered a parallel universe where up is down?
No. The answer lies with earnings. Determining whether stocks are cheap or expensive is not a matter of price alone. Earnings play a role too. You’ll recall that the price to earnings (P/E) ratio is the tool of choice for fundamental analysts to discuss just how rich or cheap a stock is trading. Stocks with higher P/E ratios are more expensive than those with lower P/E ratios.
While the S&P 500 is up 20% year-to-date, the blended earnings growth is up 85% year-over-year. Due to the different time frames, these numbers aren’t exactly apples-to-apples, but you get the point. According to Factset, this “mark[s] the highest year-over-year earnings growth reported by the index since Q4 2009 (109.1%). The unusually high growth rate is due to a combination of higher earnings in Q2 2021 and an easier comparison to lower earnings in Q2 2020 due to the negative impact of COVID-19 on a number of industries.
Here’s the point. Because earnings have grown faster than stock prices, market valuations have dropped when looking at the forward P/E ratio.
How about that?
#TeamTackle
Chart of the Day
S&P 500 Forward P/E Ratio
As earnings (yellow) have come rocketing back, the P/E ratio (blue) has shrunk. And this has come despite prices rising to the moon this year. Impressive, most impressive.
Video of the Day
Onboarding with Coach Frank
Coach Frank always does a fantastic job highlighting the new and existing features for new members to the Tackle Trading community. Last night was no different. Check out last night’s onboarding session with Coach Frank if you want to see what Tackle Trading has to offer you.
Today’s line up
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