What happens to the P in P/E-ratio when the E goes down?

What happens to the P in P/E-ratio when the E goes down?

30 June 2022 from Carlsquare

As we all have heard, markets are talking about the risk of a recession. This risk is also being priced in. As can be seen in the chart below, the forward-looking Price/Earnings (P/E) ratio for S&P 500 (SPX) is currently trading around 15,7x, somewhat below its average since July 2002. It is also clearly down from the top just above 25x in mid-June 2020.

Even though the recession risk is clear, equity analysts are still believing in increasing earnings  during the next twelve months. See the chart below. But as we’ve learned from history, analysts’ estimates are typically the most incorrect ahead of a recession. This means that earnings estimates need to come down if a recession becomes reality.

 So if the E in P/E goes down, the Price (as in S&P 500) must follow. Otherwise, the P/E ratio increase, which is not the typical pattern at the beginning of a recession. If you believe we are getting closer to a recession, one can say that the valuation multiple perspectives indicates that there may be further downside.

The full name for abbreviations used in the previous text:
EMA 9: 9-day exponential moving average
Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.
MA20: 20-day moving average
MA50: 50-day moving average
MA100: 100-day moving average
MA200: 200-day moving average
MACD: Moving average convergence divergence

Important notice
This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future results.

04/10/2022 19:54:09

 

Write a Comment

 

  

 

  

 

* Required fields need to be filled in