A Snapshot Of U.S. Equity Valuation Levels

Bob Carey
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A Snapshot Of U.S. Equity Valuation Levels

Posted Under: Broader Stock Market

View from the Observation Deck

An argument can made that the stock market had become a bit extended through the first three-quarters of this year and was due for a pullback (decline of 5.00% to 9.99%) or correction (decline of 10.00% to 19.99%).
That is exactly what we experienced in October 2018. The S&P 500, S&P MidCap 400 and S&P SmallCap 600 Indices posted total returns of -6.84%, -9.55% and -10.48%, respectively, for the month, according to Bloomberg.
While sell-offs in the stock market are never a pleasant experience, they are a normal part of any bull market and can provide investors, particularly those with ready cash, a more favorable entry point into the market.
As indicated in the table, trailing 12-month P/E ratios as of 11/5/18 are mostly lower than where they stood at the close of 2017.
The estimated P/Es for year-end 2018 and 2019 also look more favorable due to October's sell-off and strong corporate earnings.
To lend some further perspective to valuation levels, we find the S&P 500 Index's 2018 year-end estimated P/E of 16.77 relatively enticing considering it matched the index's 50-year average P/E of 16.77 as of 11/5/18, according to data from Bloomberg.

This chart is for illustrative purposes only and not indicative of any actual investment. There can be no assurance that any of the projections cited will occur. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks (currently 505) used to measure large-cap U.S. stock market performance, while the 11 major S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector. The S&P MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization.

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Posted on Tuesday, November 6, 2018 @ 2:20 PM • Post Link

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These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

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