2022: 20.6x
With earnings growth going to slow, the Fed probably starting to taper later this year and interest rates eventually rising, it will be challenging for P/E multiples to expand. Since this was a major driver of the markets rise there should be a dampening impact.One metric investors use to judge valuations is how fast earnings are growing. This is typically helpful when the economic environment is in a fairly steady state but less so when the economy has experienced a shock, such as a pandemic.
It is therefore not surprising that the S&P 500’s earnings growth will slow dramatically in 2022 vs. 2021 since 2021’s growth is compared to 2020’s pandemic created downturn. While investors inherently know this will happen, it could dampen the multiples they are willing to pay for stocks.In Butters’ report he estimates that the net profit margin for the S&P 500 companies in the quarter at 13.0%. This is above the 5-year average of 10.6% and the previous record of 12.
He said, “If 13.0% is the actual net profit margin for the quarter, it will mark the highest net profit margin reported by the index since FactSet began tracking this metric in 2008.” It is unlikely that companies will be able to maintain this level of profitability. Note that this chart is fromJohn Butters, FactSetJohn Higgins, Chief Markets Economist at Capital Economics,that looked at Robert Shiller’s Cyclically Adjusted Price/Earnings ratio or CAPE against the average annual real return from the S&P 500 in the next ten years. Using data since 1945 it shows that the stock market should have a slightly negative annual return over the next 10 years.
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