From Wolf Richter at wolfstreet.com:
With actual P/E Ratios Blowing Out Like this.
Just how overvalued are stocks, particularly small-caps? According to Wall Street, even the question is wrong. Stocks are never overvalued. They’re always a buy. The future looks bright. And even if it doesn’t look bright, analysts come up with “adjusted” earnings that are so brilliant that they blind even innocent bystanders. That’s how Wall Street justifies high stock prices.
Our miraculously visionary analysts see on average an “adjusted” forward P/E ratio for the next 12 months of 15.8 for the Dow, 16.5 for the S&P 500, 17.8 for the Nasdaq, and – get this – 16.5 for the Russell 2000, the small-cap stock market index that tracks the bottom 2,000 stocks in the Russell 3000. If that were an actual P/E ratio, the Russell 2000 would be a screaming buy. But a look at reality shows just how ludicrous these “adjusted” P/E ratios, particularly for the Russell 2000, have become. And how these folks are trying to pull a bag over our heads.
So first things first. Sales are crummy. Worse than crummy. They suck.
Total US business sales – not just sales by S&P 500 companies but also sales by small caps and all other businesses, even those that are not publicly traded – peaked in July 2014 at $1.365 trillion, according to the Census Bureau. By December 2015, total business sales were down 4.6% from that peak. A bad 18 months for sales! They’re back where they’d first been in January 2013!
Sales by S&P 500 companies dropped 3.8% in 2015, according to FactSet, the worst year since the Financial Crisis.
The strong dollar gets blamed, along with the weather. But the strong dollar is a mixed bag. Many companies whose sales are limited to the US don’t feel the strong dollar, except they’re benefiting from the lower input costs it produces. Worse than the strong dollar and the weather: Companies face a slowdown and a very tough environment in the US and globally.
This chart, based on data from the Census Bureau and the St. Louis Fed, shows just how lousy sales have been since their peak in July 2014:
The last two times total business sales declined like this were linked to recessions: just before and during the 2001 recession, sales dropped 5.0% in 12 months; and during the Financial Crisis, sales fell off the cliff, as seen in the chart.
To continue reading: OK, I Get it, this Stock Market Is Going to Be a Mess
