The biggest concern is that investors may not be willing to pay the same amount of money for earnings, even if the actual profits don't change much.
As earnings season starts, the biggest concern is not necessarily that earnings will decline. The biggest concern is that investors may not be willing to pay the same amount of money for earnings, even if the actual profits don't change much. When interest rates began declining in November of last year, stocks immediately rallied. Stock prices are based on dividend yields plus an estimate of the rate of annual earnings growth. Earnings estimates did not suddenly rise dramatically.
One reason is that the market comes to believe that earnings estimate is under threat. Let's say investors come to believe that the company will only make 50 cents in the coming year instead of $1. The P/E ratio would then go to 20: $10/0.50=20. The second reason the multiple could change is if investors decided that $10 was too much to pay for $1 in future earnings. Investors might only be willing to pay, say, $8 for that $1 in future earnings.
Stock Markets Investment Strategy John Bogle Business News
United Kingdom Latest News, United Kingdom Headlines
Similar News:You can also read news stories similar to this one that we have collected from other news sources.
The Fed projects higher interest rates, and higher inflation, for longerThe central bank has always predicted higher interest rates for longer, but now it predicts even higher inflation.
Read more »
EUR/USD falls toward 1.0600 on higher expectations of the Fed prolonging higher ratesEUR/USD continues to lose ground for the sixth successive session, trading near 1.0610 during the Asian hours on Tuesday.
Read more »
RBC raises S&P 500 forecast to 5,300, sees even more upside possibleThe higher forecast also includes an expectation for higher full-year earnings, the firm says.
Read more »
The quiet rally in energy continues, lifting our lone oil-and-gas stock higherEvery weekday, the Investing Club releases the Homestretch; an actionable afternoon update just in time for the last hour of trading.
Read more »
Stock market today: World stocks higher ahead of US and Japan rate decisionsAsian stocks have advanced and European markets started the day with gains ahead of policy decisions this week by Japan’s central bank and the Federal Reserve.
Read more »
Stock market today: World stocks higher ahead of US and Japan rate decisionsAsian stocks have advanced and European markets started the day with gains ahead of policy decisions this week by Japan’s central bank and the Federal Reserve.
Read more »