The Data Indicates the US Stock Market is Undervalued

The Data Indicates the US Stock Market is Undervalued


After 7 weeks+ of volatility financial guru’s are trying to explain what is fueling this stock market action, when the data say the market is undervalued.

There looks to be a new “headline of the day” knocking the stock market.  Chinese trade talks, BREXIT, government shutdowns, Fed rate hikes, inverted yield curve recession conspiracy driving this market.

None of these issues have any significant impact on the underlying US economy.

The Big Q: Why do they cause so much seesawing in the market?

The Big A: Go back to Econ 101

In the long-term, the US stock market always reflects the trend and direction of the underlying US economy.  And now, the US economy is currently on pace for its fastest growth since Y 2015. 

Historically, stock market corrections, fueled by political, foreign policy or governmental issues, usually has a short to near term effect. And, when it dawns on investors these issues do not impact the underlying economy, the market recovers, reversed fast. 

These correction recoveries are usually V-shaped meaning fast and high. 

Participants can take comfort in the fact that the current pull back in the equities has left the stock market undervalued. 

According to FactSet, the current 12-month forward P/E ratio for the S&P 500 Index is currently at 15.4X annual earnings.  

This P/E ratio is well below the 5-year long-term average of 16.4. At the sector level, the Consumer Discretionary sector has the highest forward P/E ratio of 19.8, while the Financials sector has the lowest forward P/E ratio of 11.1, per FactSet.

For now, participants can only consider forward P/E ratios, because the traditional backward looking, trailing P/E does not include the effects of several months of tax cut legislation that did not go into effect until earlier this year.

So, with the S&P 500 index so undervalued, participants should adhere to this advice: buy low and sell high. 

The Key reason to invest now is the consensus forecast for the S&P 500 Index (SPX) will increase in price 17.1% over the next 12-months, according to consensus estimates compiled by FactSet of 11,125 analyst’s ratings for S&P 500 companies.

Have a terrific week. 

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