Valuations caught a breather in recent weeks as the market finally tripped up. Note that the forward p/e ratio for the S&P 500 now sits at 21.7, based on blended forward-year earnings compiled by Bloomberg. We haven’t seen readings that high in almost 20 years. But, earnings are clearly depressed at the moment, and it’s debatable if the market is even trading based on near-term earnings estimates anyway. If we use earnings two-years forward, the market is trading right in-line with where it did pre-COVID (in the 16-to-17 range). If that seems like an analytical stretch, recall that the market was also ‘most expensive’ by this measure in late-2009, after the rebound was already underway—that would have been the wrong conclusion. Looking at it another way, the forward earnings yield has compressed to roughly 4.6% (down 1.7 ppts versus the 2019 average), but the spread versus 10-year Treasury yields is right in line with that year. So, the Fed’s extremely accommodative stance, expected to last well into the future, is playing a role here too.
The TSX was flat, with gains in materials offset by weakness in tech and energy. The Bank of Canada left interest rates and the QE program unchanged, as widely expected. The Bank argued that the economy “will continue to require extraordinary monetary policy support” until excess capacity is absorbed—we judge rate hikes won’t even be in the conversation until 2023.