EarningsBeats.com Digest for August 2, 2021
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Are High PE Ratios Suggesting An Imminent Decline?
No. All the talk about PE ratios are too high are NONSENSE. You have to understand how the stock market works. Prices are always reflecting what's ahead. The PE ratio is the price divided by expected future earnings. As earnings rise above expectations, so do Wall Street assumptions. Higher earnings will result in higher prices, but you have to keep in mind that the PE ratio of the S&P 500 is based upon expected
future earnings. As the real numbers are reported, assumptions will change as the S&P 500 moves higher. In a growing economy, the PE ratio will always look expensive. It's simply how the stock market works. Earnings are BLOWING AWAY ESTIMATES this quarter. We analyze earnings results and reactions each quarter at EarningsBeats.com and we pass along this information to our annual members via an Excel spreadsheet. I want to share with you the
total actual earnings vs. expected earnings each day for companies with market caps over $1 billion. Here's the total for the first 9 days of earnings season:
- Tuesday, July 13th: $24.08 vs. $17.45, or a 37.99% beat
- Wednesday, July 14th: $18.88 vs. $14.91, or a 26.63% beat
- Thursday, July 15th: $24.17 vs. $20.74, or
a 16.54% beat
- Friday, July 16th: $6.65 vs. $6.65, or
a 0.00% beat
- Monday, July 19th: $28.64 vs. $24.87, or
a 15.16% beat
- Tuesday, July 20th: $51.32 vs. $41.96, or
a 22.31% beat
- Wednesday, July 21st: $191.66 vs. $156.39, or
a 22.55% beat
- Thursday, July 22nd: $139.66 vs. $119.61, or
a 16.76% beat
- Friday, July 23rd: $17.05 vs. $16.67, or
a 2.28% beat
Earnings are consistently blowing away expectations. Many fundamentalists believe that PE ratios should always be consistent in the 15 to 20 range, but that's ridiculous. When interest rates are at or near historic lows and GDP is at or near historic highs, PE ratios deserve to be much, much higher than the norm. When I was a practicing CPA, I performed valuations. There are a number of factors that go into valuations,
not the least of which are growth rates and interest rates. Investors are willing to pay up for earnings as alternative investments are yielding next to nothing. We will reach a point where valuations are too high and our economy will experience a downturn, resulting in deteriorating profits. I don't see that happening in 2021, though if the S&P 500 rises too far too fast, we could experience a deep correction, even a cyclical bear market, in 2022.
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