Dear Reader,
The stock market has been hit with a lot of volatility in recent weeks.
While all sorts of reasons have triggered investors' worries, one critical metric has held firm: expected earnings.
More precisely, expected earnings have been trending higher this year.
The combination of falling prices (P) and rising expected forward earnings (E) has caused the forward P/E — maybe the most popular measure of stock market value — to fall to levels we haven't seen in a long time.
According to FactSet's research, the forward P/E on the S&P 500 fell to 18.5. This is below its five-year average of 18.6.
The last time this metric was below that level was on April 15, 2020.
This may seem challenging to process, considering the stock market's performance so far this year and simultaneous economic and geopolitical concerns.
However, the hard data suggest things in the economy are looking up.
On Friday, we learned consumer spending jumped 2.1% in January, beating expectations.
Additionally, we learned continuing claims for unemployment benefits fell to the lowest level since 1970, a bullish sign for employment.
Executives across corporate America have been confirming that demand has been robust and increasing their expectations for earnings growth.
Now, does an 18.5 forward P/E mean the stock market can't go lower?
Absolutely not.
Stocks can swing wildly in the short run, and P/E ratios are unreliable for timing the markets.
However, we can say that the stock market has become more attractive relative to earnings, which are rising. And in the long run, earnings are one of the most important drivers of stock prices.
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