Is it complacency? Exuberance? Uncertainty? Exhaustion? Insight? Intuition?
Last week, all three major U.S. stock markets gained value and two reached new record highs. On the face of it, that’s great news for stock investors. However, if you look below the surface, the markets’ upward trend may have you scratching your head.
“That the S&P would hit a new high was all the more surprising given the lack of reaction to major headlines throughout the week. On the plus side of the ledger, Congress managed to avoid a shutdown, while on the downside, President Donald Trump tweeted that the U.S. ‘needs a good shutdown,’ and the Federal Reserve appeared more hawkish than prognosticators had been prognosticating. Nothing. Then there’s the prospect of a shocker in the French election over the weekend, though the pro-Europe candidate Emmanuel Macron is widely expected to beat the more-radical Marine Le Pen. Yet here we are. ‘It’s like the market took Novocain and is numb to everything,’ says Thomas Lee, head of research at Fundstrat Global Advisors.”
It may be investors give more weight to company performance during the first quarter than to other factors. So far, 83 percent of the companies in the Standard & Poor’s 500 (S&P 500) Index have reported first quarter earnings (earnings measure a company’s profitability). Three-fourths of the companies reported earnings were higher than had been estimated, reported FactSet.
Strong earnings show companies have performed well. Price-Earning (P/E) ratios help investors gauge whether a company’s stock, or a stock index, is a good value. The P/E ratio indicates the dollar amount an investor may pay to receive one dollar of a company’s or an index’s earnings, according to Investopedia.
Last Friday, the trailing 12-month P/E ratio for the S&P 500 Index was 21.9. That’s quite a lot higher than the five-year average of 17.4 or the 10-year average of 16.7.
At the same time, the forward 12-month P/E ratio for the S&P 500 Index was 17.5. That’s also a lot higher than the five-year average of 15.2 or the 10-year average of 14.0.
So, why are highly valued markets moving higher? It’s a puzzle.