Valuations are Stretched – What Needs to Happen?

As of last Friday’s close, the Dow Industrials brandish a P/E of 18.77, the S&P 500 is more expensive at 20.97 and the Nasdaq’s P/E is 33.18. In all three cases, valuations are clearly stretched. Q4 earnings will need to put a floor under equities in order to avoid a meaningful pullback in coming months. The most important sector from my perspective has always been the financials. The sector isn’t scheduled to begin releasing Q4 results until January 10th, which will leave equity markets a bit vulnerable to an additional reset lower in prices until then. In the event we receive Q4 results from the financial sector that either hits or exceeds consensus expectations after January 10th in conjunction with constructive forward looking guidance – look for our rally to find some wind at its back. I suspect, given the uptick in many measures of economic activity that we saw in Q4 in conjunction with surging consumer confidence, we may well see prices move incrementally higher in January though we may see weakness out of the gate.

Flickr photo: Paul-Skinner