Since last fall, the stock market has been climbing back up the ladder of financial success. However, the vital ingredient for this might have had something to do with a +21 % P/E Multiple Expansion. In a recent morning report from Goldman Sachs Group, Inc. (NYSE:GS) they explain just how these revisions have helped.
Although the consensus EPS have been estimated down 2.4%, the S & P 500′s (INDEXSP:.INX) rating revisions helped increase their P/E from 21% to 13.2X. They further explained the following:
Equity valuation is fair vs. history but appears low vs. bonds S&P 500 P/E is slightly above its long-run average as well as discounted cash flow, cyclically-adjusted, and macro valuation models. However, the earnings yield is 475 bp above the 10-year US Treasury yield, nearly twice its average spread during the past decade, and also attractive vs. real yield.
US Treasury yields are artificially low creating an excess discount We estimate the 10-year UST yield is about 75 bp lower than growth and inflation expectations suggest. Correcting for that dislocation in our Fed model lowers potential S&P 500 upside by about one-third. The early stage of rising rates, if induced by growth, is likely to benefit equity valuation.
Standard & Poors (S &P 500) has been around since 1957 as a trusted source for a free-floated capitilization index. They have roughly 500 companies in their index including 3M, Abercrombie & Fitch, Aflac, AT&T, Avon, Coach Inc, Coca-Cola Enterprises, Darden Restaurants, Estee Lauder, and many more. Most of the companies within their index are U.S. based. They are only second to Dow Jones Industrial Average when it comes to faithful followers.
It’s good to know that there is some improvement in the economy, albeit even if it’s minimal. I understand that the S & P’s ratings adjustments sometimes help reassess a company’s financial successes and hopefully that will improve trust between the traders, which in turn will improve the economy that much faster.