Investors are deceiving themselves by focusing on price-to-earnings ratios for the U.S. stock market that are actually “price-to-fantasy” ratios, according to a pair of noted market researchers.
The level of optimism on Wall Street strikes some observers as fanciful, especially if the United States slides into a recession, as many economists expect. David Rosenberg of Rosenberg Research made a similar point in a note Wednesday. “What the risk-on trade doesn’t seem to be recognizing at the current time is the visible compression in global corporate profits and margins,” he wrote.who think the market is now priced at bargain levels may want to take a moment to ponder the peculiar way that stock market valuations are typically expressed.
Operating earnings deliberately exclude the impact of extraordinary items that won’t be repeated or discontinued lines of business. In theory, ignoring these one-off or obsolete events gets rid of a lot of meaningless noise and focuses only on what matters for the future.