Speculation sent stocks to frothy, expensive highs. A sell-off was inevitable.
Today’s dip had an obvious trigger.
It sure doesn’t feel good. But investors may console themselves with the idea that the beatdown dished out by the markets over the last couple days — including an ugly open for the SPDR S&P 500 Trust today — may simply be the reassertion of reason in a market puffed up with a fair bit of speculative froth.
As we’ve mentioned recently, by even the most rudimentary measure of valuation — the forward price-to-earnings ratio — stocks were getting incredibly expensive compared to expected earnings over the next 12 months.
In recent weeks, the forward PE-multiple on the S&P almost hit 22 — the average going back to 2000 is roughly 16.5.
That nosebleed level has only really been seen during the Covid-related stock market surge and the tail end of the dotcom boom, implying the market rising far faster than mere fundamentals could justify, making it vulnerable to an ugly snapback, which it seems we’ve gotten.
The bad news? For valuations to return to more sane levels, the slump may have to go on for a while.
