Stock Markets Are At Tech Bubble Valuation Levels

The June quarter’s earning season is pretty much over with only about 10 companies in the S&P 500 left to report. Even though this quarter’s earnings were dismal compared to a year ago, since so many companies had not given guidance due to Covid-19 shutdowns analysts were essentially flying blind with their projections. In this environment they would be prone to err on the downside and forecast pretty dire results.

However, the stock markets have rebounded from their March lows and are posting gains for the year even with full-year earnings forecasts being crushed. The gains in stocks are thus totally attributable to valuations rising.

Earnings beats were the highest in over a decade

With the economy reopening to some degree, but more important, managements taking action to cut costs, earnings wound up being better than forecast at a much higher rate than historical trends. With the tech sector leading the way with 94% of the companies beating projections and Real Estate being the worst sector at 61%, the S&P 500 companies in total beat analyst projections by 84%. This was significantly above the five-year average of 72% and the highest percentage since 2008 when FactSet started tracking this metric.

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However, earnings were down 32% year over year

While earnings results were stronger than analysts were projecting, they were down 32.2% year over year. This isn’t surprising given the lockdowns the economy was enduring along with the swiftness of the shutdowns. With over 48 million people filing unemployment insurance claims between the middle of March and the end of June the economy shrank 31.7% during the quarter.

This led to a collapse in 2020 and 2021 earnings projections

At the beginning of the year the S&P 500 companies were forecast to earn $177.77 and $196.57 in 2020 and 2021, respectively. However, with the economy shutting down and rebounding sporadically, earnings have fallen to $132.11 (down 25.5%) and $166.14 (down 15.5%), respectively.

The other earnings metric to be aware of is that the current EPS estimate for 2021 of $166.14 is only 3% and 2% higher than 2018’s and 2019’s actuals, respectively.

Market gains have all been due to valuations rising

At the beginning of the year the S&P 500’s PE multiple was 18.2x based on earnings of $177.77 and the S&P 500 at 3,230.78.

Currently the S&P 500’s forward 12-month EPS is $146.81 (lower by 17.4% since the beginning of the year). With the Index closing at 3,508 on Friday, up 8.4% for the year, its PE multiple has expanded to 23.9x (higher by 31%). This puts it back to levels not seen since the tech bubble in early 2000.

The dangerous statement to make is that it is different this time since interest rates are so low. However, with the Fed essentially promising that they will remain low for the foreseeable future, even if inflation were to pick up, there are few places for investors to put their money to work.

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