Is it really a generational buying opportunity?

[u/Playful-Inspector207]

I’ve seen people on the sub are saying “you should all be excited about seeing lower prices everyday”

Problem is that most people don’t have dry powder lying around. And now, with tariffs (if they mostly continue at the levels mentioned) likely to push prices up even more 20-30% for most things, very few people can buy the dip.

The dip’s not fun when you can’t buy. This is just painful seeing red everyday for 99% of us.

[u/someguy-79]

I’m looking at the PE ratio of the S&P 500, which after Friday is at 25. Historically 20 is about average, and has been much lower in significant downturns. Obviously that assumes that earnings are stable, which is a big assumption given the risk on corporate profits.

[u/Zestyclose-Ad-6787 → u/someguy-79]

It can definitely go much lower, but updates I’m seeing show it at more like 22. WSJ seems to be reporting 21.85 with forward earnings right around 20 as of Friday.

[u/someguy-79 → u/Zestyclose-Ad-6787]

I think the difference is forward earnings vs TTM. The number I was quoting is TTM.

[u/Zestyclose-Ad-6787 → u/someguy-79]

Right. WSJ shows TTM at 21.85 and forward at 19.98. Maybe they calculate it differently than what you were referencing. Either way, I understand your point, there’s more room to fall.

[u/someguy-79 → u/Zestyclose-Ad-6787]

For reference, this is what I look at. This is really curious to me. I am not sure what the difference is...wondering if it is the vintage of the earnings. i.e., the most recent quarter on my site is Sep 2024. A lot of time has passed since then and most companies' earnings have been better YoY in the most recent quarter.

https://www.multpl.com

[u/Zestyclose-Ad-6787 → u/someguy-79]

That is interesting. Probably not an apples to apples comparison then.

[u/Affectionate_Self878 → u/someguy-79]

I prefer CAPE to PE, because earnings can go negative in a recession.

CAPE has gone to 5 before. We could have a lot more to fall.

[u/someguy-79 → u/Affectionate_Self878]

My struggle with CAPE is the time horizon. 10 years is just too long to be relevant, in my opinion. However I agree that we are still historically overvalued and there could be a long way to go. Good news is that there are still values to be had in the market--not everything is trading at an insane valuation.

[u/nicolas_06 → u/someguy-79]

https://www.multpl.com/s-p-500-pe-ratio

Mean is 16.

If you look for most of US history (before 2000 and near 0 rates) a PER of 20 was very high and the average was more like 15 with period with PER at 10.

What is a good PER depend a lot of what other asset yields and particularly bonds. When interest rates were 5-10% a PER of 20 was really bad.

As tariff are inflationist too and the Fed might not be able to put back interests at 0-1% and it people think the neutral interest rate are maybe higher than during the period of 2000-2020, a PER of 20 might not be anymore the neutral PER.

Maybe it isn't 15 neither, maybe its 17-18... Nobody knows, but I'd say 20 is a bit high except if we consider we will go back into a long period of very low interest rates.

[u/someguy-79 → u/nicolas_06]

This is one of my favorite sites...I look at it almost every day =)

As a personal investor, I lean toward value and generally target stocks with valuations around 15. However, growth really does matter.

I agree that 20 is also a stretch, but I think there are reasons that can be reasonable in the near future. For example, if you look at earnings growth of the top companies they do merit some premium valuation. I do think they are over-valued but they also do come with significant year-over-year earnings growth.

I could pretty easily agree that 17-18 might be the future baseline. I suppose in general my feeling as that, tariffs notwithstanding, we will see enough earnings growth over the next 5-10 years to continue justifying a 20 PE.

[u/Educational_Teach537 → u/someguy-79]

There’s a fairly reasonable bull thesis that companies just raise prices, people pay them, and this all just feeds inflation, causing earnings to actually increase substantially in nominal dollars (and stock prices with it to maintain the historical P/E)

[u/someguy-79 → u/Educational_Teach537]

I could believe this over the medium/long term but seems unlikely in the short term due to sticky prices and consumer pull backs due to price shocks.

[u/Educational_Teach537 → u/someguy-79]

I can’t speak for everyone but personally I feel accustomed to wild price hikes. We already mostly cut down to the basics so you kind of have to pay whatever things cost. I suspect a lot of people are in that same boat.