Unless I think a business is trading at a discount, I don’t cheer stock price movement forward. I cheer on earnings growth. If a business grows by 5% in a year, I expect the stock to go up by 5%, all else equal. When the stock price goes up much faster than earnings growth, or lags it by a noticeable amount, then I evaluate the business to see how much current sentiment is shaping future returns.
The consequence is that I don’t really cheer the post-election rally that we’ve seen since November 9th. Most stocks are up about 5% since then, though sectors such as financials and industrials have received outsized gains. This creates a problem for those seeking out investment opportunities because the P/E ratio of stocks continues to climb.
I have previously lamented that the S&P 500 doesn’t have great prospects going forward because the P/E ratio was … Read the rest of this article!