While the S&P 500’s P/E multiple has declined from 21.3x on 2022’s earnings and 19.5x on 2023’s at the beginning of the year, in the face of increasing interest rates it would not be surprising to see this valuation multiple compress some more this year.
After initially reacting to the downside when Russia invaded Ukraine, the equity markets rallied on Thursday and Friday with the S&P 500 and Nasdaq showing gains for the week. Even though the S&P 500 and Dow Industrials fell on Monday, the Nasdaq rose and overall the markets performed well given the severe financial sanctions the U.S. and other countries have imposed on Russia. The S&P 500 could still move lower due to valuation compression John Butters, FactSet’s Senior Earnings Analyst, tracks the earnings of the S&P 500 companies and publishes a detailed weekly report. Based on Monday’s close of 4,373.94 the S&P 500 is trading at 19.4x 2022’s estimated earnings of $225.42 and 17.6x 2023’s earnings. By breaking down the equation that determines an equities or Index’s value to the basic equation of earnings times valuation multiple determines its price, it appears that the S&P 500 Index could fall more than the 8.2% it has so far this year. To see what technical analysis forecasts for the S&P 500 check out this article. Earnings times valuation multiple determines price In one aspect, understanding and determining an equity’s price can be thought of by using two metrics; earnings and the valuation multiple applied to them. Earnings are pretty straightforward and consistent as long as a major shock to the system does not occur, such as the financial meltdown just over a decade ago and the coronavirus.
