Stock Market Valuation Levels Remain High

By Tom Burnett CFA
The June 17, 2021 FACTSET report on earnings estimates for the S/P 500 Index companies reflects the growing analyst optimism about the corporate earnings picture. The consensus estimates for the second quarter are now 61% above the Q2 2020 earnings results that were badly damaged by the global Covid-19 outbreak. If confirmed, that result would represent the largest quarterly year-over-year increase since the 2010 recovery from the financial crisis.
The consensus Index forecast for 2021 is now $190, a 35% increase from the $140 achieved in 2020. Growth of an additional 11.5% is expected for 2022 where the Index earnings are projected to reach $212.
The Index forecast of $190 for 2020 is a 15% increase from the consensus estimate disclosed in the September 11, 2020 report. Analysts have been regularly raising their earnings estimates since the market depths of the 2020 Covid-related recession.
The stock market is now trading at a multiple of 22x the forecast of 2021 earnings, well above historical S/P 500 multiples. For example, the average P-E ratio over the past five years is 18.0x and the ratio over the past ten years is 16.1x. Earnings have recovered sharply from the bottom in 2020, but the market seems to have priced the growth into the current multiples and investors need to watch these earnings multiples closely.
Tom Burnett CFA is the Director of Research