- The stock market is trading at its highest valuation in 18 years, according to data from FactSet.
- The S&P 500 traded at a forward price-earnings ratio of 20.4 last week, which is above its five-year, 10-year, 15-year, and 20-year average and is the highest since April 2002.
- Driving the surge in valuation is the drop in earnings estimates and the resilience of stock prices, which have held up well despite more than 33 million job losses being lost in seven weeks.
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The stock market is trading at its highest valuation in 18 years, according to data from FactSet.
Despite 33 million job losses in seven weeks and a skyrocketing unemployment rate due to the coronavirus pandemic, the S&P 500 traded last week at a forward price-earnings ratio of 20.4, which represents the highest level since April of 2002.
The current market valuation is also higher than its five-year (16.7), 10-year (15.1), 15-year (14.6), and 20-year (15.4) average.
The peak of the S&P 500 forward price-earnings ratio over the past 20 years is 23.4, reached at the height of the dot-com bubble on September 1, 2000.
Looking under the market’s hood, consumer discretionary stocks led other sectors in exceeding its 20-year forward price-earnings ratio, which currently sits at 36.6, more than double its 20-year average of 17.8.
On the opposite end of the spectrum, the energy sector doesn’t currently have a forward price-earnings ratio due to negative analyst earnings estimates over the next year.
Driving the surge in valuations are two things: a roughly 30% surge in stock prices off their March 23 low, and the precipitous drop in analyst earning estimates over the next 12 months.
Analyst forward-looking earnings-per-share estimates for the S&P 500 have decreased 16.2% over the past two months, and could fall further as the economic damage caused by the coronavirus becomes clearer as time goes on.
The forward price-earnings ratio was 13.1 on March 23, representing a 55% increase to last week’s level of 20.4.
With more than 86% S&P 500 companies having reported first quarter earnings, the blended earnings decline for the first quarter is 13.6%, while the blended revenue growth rate for the first quarter is 0.6%.
Analysts currently estimate a 40.6% decline in second quarter earnings, a 23% decline in third quarter earnings, and a 11.4% decline in fourth quarter earnings, with a return to growth of 12.2% in the first quarter of 2021.