Bullish investors argue that the summer sell-off in equities has knocked stock valuations down to such a degree that exchange traded funds are cheap and safe to buy.
The price-to-earnings ratio for the S&P 500 has dropped to a level not seen since 1990, according to Chart of the Day.
However, there are caveats. If the economy slips into another recession, then Wall Street’s current earnings forecasts could end up being way too optimistic.
“We are now back at normal P/Es where some might even say that the market is cheap,” writes J.C. Parets at All Star Charts. “But can it get cheaper? Of course. The problem here is the ‘E’ [earnings]in P/E. We don’t know what the earnings are going to look like. All we have are estimates – and they’re always getting revised.”
Indeed, earnings estimates have been too rosy in recent economic pullbacks, especially in the 2007-2009 “Great Recession.”