This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Has The PE Recovery Gone Too Far, Too Fast?

FTSE Russell

Contributor:
FTSE Russell
Visit: FTSE Russell

By:

Head of Global Markets Research

Forward PE multiples have fully recovered from their March lows, with most now at or approaching their highest levels of the past five years. The bounce has been particularly striking for the US large-cap Russell 1000, which has climbed more than 600 basis points to around 20× (a 15-year high), and for the FTSE Europe, up more than 500 basis points. The Russell 1000 multiple retains its sizable premium to those of its developed peers, which have converged around 14-15×. 

Regional 12-month forward price/earnings ratios (×)

Regional 12-month forward price/earnings ratios (×)

Source: FTSE Russell / Refinitiv. Data as of May 15, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

But, as the chart below illustrates, the global re-rating since the March nadir reflects the perverse combination of rising “Ps” and sharply falling forecasts for “E”.

Price/earnings decompositions

Price/earnings decompositions

Source: FTSE Russell / Refinitiv. May 15, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

This tells us that markets are looking beyond today’s bleak pandemic-shattered economic landscape to the far brighter prospects on the post-lockdown horizon, reinforced by unprecedented central-bank and fiscal support. But have they gotten ahead of themselves?

As shown below, consensus FTSE All-World EPS forecasts for 2020 have been slashed back to 2017 levels of around $19, wiping out all of the US tax-cut-fueled gains since then and a stunning reversal from the strong growth projected for most markets only three months ago. At the same time, however, analysts have raised their estimates for 2021, which now anticipate even more robust recoveries across global markets than envisioned earlier.

FTSE All-World Index consensus EPS estimate trails (USD)

FTSE All-World Index consensus EPS estimate trails (USD)

Source: FTSE Russell / Refinitiv. May 15, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

But there are reasons for caution. Forecasts for 2021 largely reflect base effects, as well as the tendency of analyst forecasts to initially overshoot, as the pattern of EPS trails in most years attests. And, with a record number of firms suspending guidance and hard data still scarce, earnings visibility remains unprecedently low.

Negative operating-leverage risks persist

As the chart below shows, there is the tight historical relationship between shifts in revenues and margins (operating leverage) and EPS growth prospects. With the economic ravages of the Great Lockdown already rivaling the worst experienced since the 1930s and the timing and pace of recovery still highly uncertain, negative operating-leverage risks remain elevated.

Russell 1000 revenue growth, net margins and 12-month forward EPS growth

Russell 1000 revenue growth, net margins and 12-month forward EPS growth

Source: FTSE Russell / Refinitiv. May 15, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

As this implies, though the worst may be behind us, it’s still too early to sound the “all clear” on the negative earnings cycle.

Originally Posted on May 20, 2020 – Has The PE Recovery Gone Too Far, Too Fast?

Disclosure: FTSE Russell

Interactive Advisorsa division of Interactive Brokers Group, offers FTSE Russell Index Tracker portfolios on its online investing marketplace. Learn more about the Diversified Portfolios.

This material is not intended as investment advice. Interactive Advisors or portfolio managers on its marketplace may hold long or short positions in the companies mentioned through stocks, options or other securities.

© 2020 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®“ and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided “as is” without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of the FTSE Russell products, including but not limited to indexes, data and analytics or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.

No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained herein or accessible through FTSE Russell products, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.

This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB, BR and/or their respective licensors.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from FTSE Russell and is being posted with permission from FTSE Russell. The views expressed in this material are solely those of the author and/or FTSE Russell and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

trading top