More Air Coming Out Of Valuation Multiples

May 7, 2022 2 min read
More Air Coming Out Of Valuation Multiples

The air continued to come out of stock valuation multiples this past week. It has mostly been coming out of the S&P 500 Growth index’s MegaCap-8—i.e., Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Nvidia, and Tesla. Consider the following:

(1) MEGACAP-8 - Their collective forward P/E was down to 25.4 on Friday. During 2020-21, it mostly ranged between 30.0-38.0. It is now below its pre-pandemic peak of 29.0. Its pandemic-lockdown-recession low was 21.5.

(2) S&P 500 GROWTH - The MegaCap-8 currently accounts for about 45% of the market cap of the S&P 500 Growth composite (down from a recent record high of 50%) and 22% of the S&P 500’s market cap (down from a recent record high of 25%). Growth’s forward P/E is down to 20.8.

(3) S&P 500 VALUE - The forward P/E of the S&P 500 Value composite may be finding a bottom around 15.0.

(4) SMIDCAPS - At 12.8 and 12.4, the forward P/Es of the S&P 400 MidCaps and S&P 600 SmallCaps remain very cheap, especially considering that their forward earnings continue to rise to record highs (as does the forward earnings of the S&P 500).

(5) BOTTOM LINE - There shouldn’t be much more near-term downside for forward P/Es unless the economy is on the verge of a recession. We don’t think so, although we do see a 30% risk of a mild recession over the next 18 months.

Note: “Forward P/E” is price/earnings ratio using forward earnings as the denominator. “Forward earnings” is the time-weighted average of industry analysts’ consensus operating earnings-per-share estimates for this year and next. The time weighting removes past periods from the estimates. So forward earnings is a useful proxy for expected earnings over the next 52 weeks and thus is a better representation than annual estimates of the earnings that industry analysts actually anticipate over the year ahead.
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