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It’s become a familiar refrain after each market shock: equities hold up because earnings estimates keep grinding higher. But this argument misses an important point, since “the nature of the shocks we’ve faced over the past few years has been such that analysts and management teams alike are loath to adjust their estimates until they absolutely have to,” says Garrett Melson, CFA, Portfolio Strategist at Natixis Investment Managers Solutions. In practice, that delay means most of the initial market response shows up as multiple compression rather than earnings downgrades. Over time, however, markets tend to reconcile this gap, with price action ultimately reflecting some mix of lower multiples and softer earnings growth, even as Corporate America works to manage through the disruption.
Forward P/E represents price-to-earnings ratio based on next twelve months earnings estimates.
Forward EPS represents next twelve months earnings per share estimate.
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This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers, or any of its affiliates. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary
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