The economy and the markets are in a cautious state

The markets are flat as it awaits the CPI (5/10) and PPI (5/11) later this week. The markets had a good finish last week with the job claims being better than anticipated. Although there are positive signs, the markets are still very volatile as rates continue to have a negative effect on the economy and inflation is still persistent. At the annual shareholder meeting, Warren Buffet and Charlie Munger of Berkshire Hathaway remained steady with some positive comments. They warned of slowing earnings which would be a negative for the market. Also, Yellen is warning of dire consequences and chaos if we don’t approve a debt limit increase. There is confidence Washington will work it out at the last minute but with Washington who knows.

Looking at the S&P 500 index earnings’ outlook. The S&P 500 index, which tracks the performance of 500 large-cap stocks traded on US exchanges, the historical average EPS for the index has been around $80-$90 per share over the past decade while the PE ratio is usually around 15-20 in the past few decades. As of May 6th, 2023, the current PE ratio of the S&P 500 is approximately 28.1x based on the trailing twelve months earnings.

This means that the current price of the S&P 500 index is 28.1 times higher than the earnings of its companies over the past 12 months. If we are expecting earnings to slow, you can expect the PE ratio to revert to the historical PE. This means stocks could be overvalued unless earnings start to surprise more to the upside. As we have recommended, it is best to buy for the long-term and be patient. Buy companies with strength in the balance sheet and income statement. Until we get some positive news, we will be patient, disciplined and do our homework.

More to come tomorrow.

Published in Fiscal Investor News