00:00 Speaker A
We have a scatter plot. Each one of these blue dots, and there’s a bunch of them and I know it looks like the Milky Way galaxy, represents six months. And so we have two axes here. You can go up and down and that’s S&P 500 performance, and then you have their six month S&P 500 forward PE change. And so that’s just a forecast of is a stock getting more expensive or less expensive. So, in the upper left here, this means that all these, all these six-month periods, you have a S&P 500 performance positive, and you have the stocks getting cheaper. That is a lower PE. And right now, stocks, as you point out, are up 11 and a half percent over six months and the valuation has shrunk 8.2% and you do the math, that can only happen with incredible earnings growth. So, kind of break this down for us.
00:39 Speaker B
Well, I think you did a great job breaking it down there. Yeah, so what we’re look looking at here is the historical relationship between the forward PE and the S&P 500 change over six months. So typically when you have multiple expansion or you, you know, stocks get more expensive, um, the stock market goes up and when they get cheaper, the stock market goes down. Right now, the stock market’s actually getting cheaper as the prices are going up.
01:03 Speaker B
And so there’s an adage on Wall Street that
01:04 Speaker A
ope, sorry.
01:05 Speaker A
No, I was just going to say, and this is very, very unusual to have. This is something that happens out of a recession or a market bottom, but we’re at all-time highs. I do want to hear that adage you were just about to say.
01:16 Speaker B
Yeah, so there’s an adage on Wall Street, um, that it takes a lot of uh E to offset PE. And what that means is when if I gave you the earnings figure for 2027 for the full year, it would be very difficult to predict where the stock market ends up because the PE ratio, if it goes from 20 to 25, that’s a big change. And here, what’s happening is the PE is falling and there’s a lot of E that’s making up for the fall in PE ratio. And so that’s contributing to the stock market actually going higher over the past six months to despite the the multiple contraction.