price to earnings ratio

Like It’s 1999!

Posted on by George Mahfouz

Stocks are partying like it’s 1999 and it is breathtaking to say the least! The Dow Jones Industrial Average (see chart here) once again set a record high on Friday, closing just under the 45000 level. The S&P 500 (see chart here) also set an all-time high closing above 6000. The Nasdaq Composite (see chart here) is remaining strong above the 19000 mark and the small-cap Russell 2000 (see chart here and below) finally made a new all-time high last week after lagging most of the year.

What in the heck is going on with the major averages and these non-stop record highs? Well, one thing to point to is the end of the 2024 election. After the results came in, stocks, crypto and seemingly everything under the sun took off! Why you ask? Well the uncertainty of would get in in is over and clearly the markets liked the results! Are we looking at some form of irrational exuberance here? Or do the markets deserve this type of non-stop record highs?

One of the metrics I have consulted with is the price to earnings ratio aka the “p/e” ratio of the S&P 500 index. The price to earnings ratio is the ratio of a company’s share price to its earnings per share. This ratio is used for valuing companies to find out how they are priced. Now when I look at the overall p/e ratio of the S&P 500 (see chart here) it is trading just under a 30 price to earnings ratio. The historic price to earnings ratio of the S&P 500 is around 17. I think it is safe to say that stocks may be getting ahead of themselves comparatively speaking. Another metric I also consult with is the relative strength index aka the RSI. The Relative Strength index is a technical indicator that demonstrates whether a stock or index is overbought or oversold. Currently the RSI on the aforementioned indexes is approaching overbought territory according to the RSI principles.

Let’s not forget stocks and/or indexes can remain overbought for extended periods of time, however, earnings must indeed reflect or catch up to where the values are currently trading at.

Good luck to all 🙂

~George

Are The Indexes Out Of Balance?

Posted on by George Mahfouz

With how hot tech stocks have been lately, one has to ask are the key indexes out of balance? Let’s take a look. It is no secret tech stocks have been on fire, the Nasdaq Composite (see chart here) has been setting records weekly. Stocks like Tesla, Apple and Amazon continue to set all time highs. Price to earnings ratios aka the P/E ratio are also expanding to levels not seen since the tech bubble of the early 2000’s. I am not suggesting that tech as a whole is in a bubble, but there can be an argument that certain tech stocks are. I am not singling out Tesla at all, but what I am highlighting is the company’s eye-popping 1000 + P/E ratio. The price to earnings ratio is a metric for valuing a company that measures its current share price to its earnings per share. For example the S&P 500 typically trades in the 15-20 P/E range. Yes, a 15 to 20 P/E multiple is the historic price to earnings multiple that the S&P 500 trades at. So when you look at Tesla and see that this company’s P/E ratio is currently over 1000, it does bring pause and perspective into the mix.

Back to the indexes that appear to be out of balance. As the S&P 500 (see chart here) and the Nasdaq Composite (see chart below) continue to set records, the majority of stocks have not returned to their pre COVID highs and still remain down on the year. This to me is something to pay attention to. Sure, some tech stocks deserve their current valuations due to how they are growing and benefiting from the widespread lockdowns. Tech stocks and the technologies they provide are serving businesses and consumers alike in a way no one would of thought of before the pandemic took hold of our country. However, even stocks like Apple have high seen quite the expansion of its P/E multiple which is currently trading at 39. Bottom line for me, as we are setting records each week, I would prefer to see a broader base rally to ensure that we are not out of balance with each and every record that is being set.

Good luck to all 🙂

~George

Are The Indexes Out Of Balance? - Paula Mahfouz

 

 

Big Time For Big Tech!

Posted on by George Mahfouz

Large cap tech stocks have taken center stage this earnings reporting season big time! Absolute blowout earnings reports came in from Amazon (NasdaqGS: AMZN), the parent company of Google, Alphabet (NasdaqGS: GOOGL) and the elders of the group Intel Corp (NasdaqGS: INTC) and Microsoft (NasdaqGS: MSFT). These tech titans are the latest reason for the Nasdaq (chart) and S&P 500 (chart) to reach and close at record highs yet again. The Dow Jones Industrial Average (chart) and the small-cap Russell 2000 (chart) are also within striking distance of their all times highs. Market observers have attributed the strength in stocks this year to a continuing low interest rate environment and the upcoming new tax policy from the Trump administration. This I get, however, no one can deny the growth that is happening in the tech world as well as other sectors of the economy.

The one note of caution I have here is the exuberant environment we find ourselves in with record highs happening weekly and in some instances daily. Yes earnings reporting season so far has been stellar but let’s not forget that we have not seen price to earnings ratios this elevated in quite some time. The question that now comes to mind are the markets and the aforementioned stocks finally at fair value? Especially as the p/e’s increase and as we approach a much higher interest rate environment over the next two years. We have been in such an accommodative monetary state for almost a decade which without a doubt has been the catalyst for equities and indexes and now the federal reserve here in the U.S. is reversing course. One of the groups that get the most affected in a higher interest rate environment are growths stocks like the aforementioned tech titans.

I am not suggesting that these stocks will not continue their upward trajectory, but I am making note and will be paying closer attention to the overall price to earnings ratios of the indexes and of high growth stocks in general as p/e’s continue to elevate. Good luck to all 🙂

~George