Since April, stock market returns have been painful for the average investor – the S&P is down more than 10%. But as the earnings season kicks into gear, some analysts are bullish on the idea that investors have pushed equities lower than is justified. If that is the case, exchange-traded funds (ETFs) may be in for a nice little surge.
According to Peter McKay of The Wall Street Journal, “some analysts… are wondering if investors have gotten a little too bearish.” Currently, the S&P 500 is trading at less than 13 times expected earnings for the next 12 months. On average, that ratio has held at about 18.
The last time we saw such low valuations was back in early 2009, in the throes of our economic crisis. But after the sell-off, we witnessed one of the strongest rallies in market history.
The big question is whether the low prices today are justified. Looking at earnings data, however, that doesn’t seem the case.
The number of companies that think earnings will be lower than expected is only slightly higher than the number of companies that think the opposite. The current ratio stands at 1.2, which is a lot lower than the long-term average of 2.1. [The Trendless Market Survival Guide.]