Flying too high?
Those fears would come at a sensitive time for U.S. stock markets. With indexes at all-time or five-year highs, investors and traders have begun to worry about valuations and the possibility that the December/January rally has left the market at a peak, with the next step downward.
Investors and traders looking for signs that they should stay in have drawn comfort from the still-reasonable price-to-earnings ratios of U.S. stocks, a standard measure of whether stocks are fairly priced.
Yes, the argument goes, the trailing 12-month price-to-earnings ratio of the Standard & Poor's 500 Index ($INX) has climbed to 17.2 from 15.62 a year ago, but the forward price-to-earnings ratio -- that is the P/E based on projected earnings for 2013 -- is just 13.5, according to FactSet Research Systems.
At that level, the market isn't cheap. But it isn't expensive, either. Not expensive in the "about to peak" sense, anyway. A forward price-to-earnings ratio of 13.5 is above the five-year average of 12.8, according to FactSet. But it is below the 10-year average of 14.2.
So on the basis of this measure of valuation, there's no reason to cut and run.
Of course, forward P/E ratios are only as good as the projections behind them. This one is based on an increase in S&P 500 earnings per share to $112.93 from an estimated $102 a share in 2012.
But what if earnings don't grow by 10% to hit $112.93? Any lag in the earnings growth rate pushes the price-to-earnings ratio of this market further above the five-year average and closer to the 10-year average.
The Wal-Mart indicator
That's why the worries about Wal-Mart's February sales and the impact of the fiscal cliff and the sequester are especially important now. If analysts are right about earnings growth in 2013, then the market has reasonable fundamentals under its recent rally. If, however, the warning signs are meaningful and projected growth for 2013 is too high, then this market is more vulnerable to a correction. (It doesn't help that 2013 increasingly looks like a year when growth will be loaded into the second half of the year, making it especially hard to judge the accuracy of analyst projections over the next few months.)
Wal-Mart's earnings announcement was an early indicator of how badly political chaos in Washington has hurt the economy. The company announced a higher profit in the completed fourth quarter, but -- as in the emails -- warned of weak sales in the current quarter.
This is by no means a final indicator. As we get closer to the actual sequester, I think anxiety will grow and we can expect Wall Street and investors to torture every number looking for clarity.
I don't think clarity can be gotten easily or quickly. This is going to take a while to figure out. And in the meantime, I think you can expect that the market will react to every piece of data that promises an answer.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Why Akamai is a smart play in cloud computing
- Look for an opportunity to buy Deere
- Why Cummins is a tough call
- Time to sell Nestlé after stock's big gain
- Why Toyota is a smart yen play
- Yum is still stalled in China
- Why Qualcomm is headed up
- Apple is still a growth stock
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this column. The fund did not own shares of any company mentioned in this column as of the end of September. Find a full list of the stocks in the fund as of the end of September on the Jubak Global Equity Fund website.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial
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