{"id":10018,"date":"2021-12-02T06:35:03","date_gmt":"2021-12-02T06:35:03","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=10018"},"modified":"2022-02-26T13:05:37","modified_gmt":"2022-02-26T13:05:37","slug":"is-the-market-too-frothy-and-out-of-whack","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/is-the-market-too-frothy-and-out-of-whack\/","title":{"rendered":"Is the Market Too Frothy and Out of Whack?"},"content":{"rendered":"\n

Robert T. from Madison,\nWI asks: <\/em>Hello Mitch, I hope you had a pleasant Thanksgiving! I\u2019m concerned\nbecause this stock market feels way too frothy. I\u2019ve been watching IPOs of\ncompanies that don\u2019t make any money go way up, and it feels like the market is\nmoving in one direction (up) while the economy is moving in another. Your\nthoughts?<\/p>\n\n\n\n

Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n

Thank you for sending in your question, Robert, and I hope\nyou had a pleasant Thanksgiving holiday as well! The economy was no doubt a\nkitchen table issue this year, given all the swirling issues around inflation,\nsupply chains, the stock market, gas prices, and on down the line. I think your\nquestion reflects the issues in many Americans\u2019 minds right now.<\/p>\n\n\n\n

I will just focus my comments here on the stock market since\nthat is the basis for your question. The S&P 500 \u2013 which is a broad index\nfor large U.S. stocks \u2013 has been pushing higher all year and has notched to new\nall-time highs several times throughout 2021. As your question mentions, this\nstrong stock market performance has coincided with an economy seemingly riddled\nwith problems \u2013 labor shortages, rising gas and grocery prices, and supply\nchain challenges.1<\/sup><\/p>\n\n\n\n

The result is the appearance that the stock market is\nout-of-whack, too frothy.<\/p>\n\n\n\n

\n\n\n\n

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But there is a huge component missing from this \u2018frothy\u2019\nanalysis, and I would argue the most\nimportant component<\/em>. It\u2019s the factor I probably write about the most: corporate earnings.<\/strong><\/p>\n\n\n\n

The stock market\u2019s supposed frothiness is sometimes just a\ngut feeling investors have, but oftentimes it is determined by the market\u2019s P\/E\nratio. This metric is also known as the stock market\u2019s \u2018valuation,\u2019 which\ninvestors use to determine if stocks are relatively cheap or relatively\nexpensive. Valuations (P\/E ratios) can be determined by looking at the previous\n12-months earnings \u2013 the trailing 12-month P\/E ratio \u2013 or the next 12-months\nestimated earnings, or forward P\/E. The latter matters more, in my view, since\nthe stock market is actively discounting future earnings and growth.<\/p>\n\n\n\n

If the stock market was indeed too frothy and out-of-whack,\nwe should expect the forward P\/E ratio to also be way too high. That would\nimply that the numerator, price, has moved higher much faster than the\ndenominator, earnings. But that hasn\u2019t happened \u2013 valuations are down over the\npast year! The S&P 500\u2019s forward P\/E ratio peaked in early September 2020,\nat over 30x forward earnings, but has retreated ever since. Today, it is closer\nto 21x forward earnings, even as the S&P 500 has climbed over 30%. The\nreason: earnings, and earnings outlooks, have been soaring! <\/p>\n\n\n\n

To be fair, I believe certain areas of the market and\ncertain companies are way overvalued. Investors should be very cautious in\npicking stocks for portfolios. But as a whole, the stock market is not frothy\nrelative to future expected corporate earnings, in my view, and is priced quite\nfairly. One signal to me that stocks have more wall of worry to climb is that many\ninvestors are not only worried but also underemphasizing just how strong\nearnings are. <\/p>\n\n\n\n

Knowing this, it can be hard not to get caught up in the noise, especially when many of the headlines are pushing you to react with fear over potential volatility. But, don\u2019t let this media noise sway your judgment and make you vulnerable to potentially costly financial mistakes.
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Mitch offers his analysis of a market that keeps climbing in spite of issues like inflation, supply chains, gas prices and more.<\/p>\n","protected":false},"author":3,"featured_media":7436,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-10018","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/10018","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=10018"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/10018\/revisions"}],"predecessor-version":[{"id":10247,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/10018\/revisions\/10247"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=10018"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=10018"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=10018"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}