After another vibrant earnings season and a series of stock market corrections, price-to-earnings ratios have begun to look more reasonable. But against a backdrop of weakening consumer confidence and sluggish growth, it may be too early to call the bottom of the market.
This week’s Chart Room looks at price to historic earnings valuations on the MSCI World index, which have dropped below 20x for the first time since the pandemic began in 2020 and are now at a level below the post-2000 average. Combined with the expectation that supply chain bottlenecks could soon loosen, with China in particular easing its most draconian lockdown measures, this could point to a more optimistic outlook for equities.
The average EV/EBITDA ratio on the same index has also now dipped below the level seen just before Covid, stepping below the average level seen since 2000.
While earnings to date in 2022 have been strong, particularly in Europe, this picture could still reverse in the second half of the year if consumer sentiment flags. The consumer confidence index for the eurozone in May stands at -21.1, not far off the all-time record low of -24.5 in April 2020. In its latest earnings call, retail giant Walmart noted that customers are increasingly opting for cheaper, private-label goods as a response to reports of inflation.
However, indicators such as fund manager surveys, cash levels, and retail sales suggest short-term negativity may be peaking and this could provide near-term support for stocks.
There are other straws in the wind that suggest we may in fact be near the bottom of the market. Equity analyst Charlie Bilello on Twitter notes that the S&P 500 has always been higher exactly a year after CNBC broadcasts one of its “Markets in Turmoil” specials, with one-year forward returns of between 4 and 77 per cent. These segments are not aired on a regular basis - there were five episodes in 2018, two in 2019, 77 in 2020 and none in 2021 - but the latest segment ran on 5 May this year. Of course, past performance is not a reliable indicator of future results, but the market has less than a year to wait to see if this indicator’s 100 per cent streak can be maintained!
Bearing all of this in mind, it takes a bold contrarian to buy this dip.
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