SAN FRANCISCO (Reuters) - Deep losses on Wall Street coupled with recent optimism about profit growth has left the S&P 500 trading at its lowest price-to-earnings multiple in over a year.
While some traders warn that a “buy the dip” mentality may be coming to an end after a nine-year stock rally, strategists who remain bullish on U.S. stocks say economic growth remains on track.
Haverford Trust Chief Investment Officer Hank Smith said that despite the S&P 500’s 7 percent slide over the past three sessions, he expects the index to end 2018 with a 12 percent gain.
“Fundamentals are strong: the rate of GDP growth is accelerating here and abroad; corporate profit growth is accelerating here and abroad,” Smith said.
The S&P 500's deep loss over two days through Monday left it priced at 16.9 times expected earnings for the next four quarters, its lowest level since November 2016, according to Thomson Reuters I/B/E/S. Investors use earnings multiples to judge whether a stock looks cheap or overvalued. reut.rs/2BHl6P3
Prior to the selloff that began last Friday, the S&P 500 was trading at 18.2 times expected earnings, pricey compared to its 10-year average of 14.5. In December, the S&P 500’s forward PE reached as high as 18.9 before analysts began to increase their estimates for companies reporting their fourth-quarter results.
Wall Street's largest companies are not the only ones to have seen their earnings valuations decline in recent sessions. The S&P 600 index of small-cap U.S. companies ended Monday at 18.2 times expected earnings, its lowest level since before August last year, which is the most recent data collected by Thomson Reuters I/B/E/S. reut.rs/2Bgxe8q
Although Wall Street’s recent selloff accounts for part of the recent dip in the S&P 500’s earnings valuation, analysts’ earnings estimates for companies have also been steadily rising, fuelled by corporate tax cuts passed by Congress in December as well as by an improving global economy.
S&P 500 components are expected by analysts to grow their earnings per share in 2018 by 18.4 percent. At the start of January, analysts estimated that S&P 500 EPS would rise 12 percent in 2018. reut.rs/2BIAomq
(Data for all graphics provided by Thomson Reuters I/B/E/S)
Reporting by Noel RandewichEditing by Chizu Nomiyama