US, WASHINGTON (ORDO NEWS) — US stock prices are falling amid the effects of the coronavirus pandemic, but determining when stocks are cheap enough to buy is not an easy task.
The S&P 500 index’s price / earnings ratio, based on a profit estimate for the next year, fell from more than 19 at the end of February to 14.2 as of Wednesday, according to Refinitiv.
Such a decline marks a fall from the highest level from around mid-2002 to below the historical average of the index.
But the numbers can be misleading. For example, many analysts argue that overall profit estimates have not yet been adjusted sufficiently to account for the economic consequences of the coronavirus pandemic. This adjustment will mean that the stock is less attractive than it appears based on the price / earnings ratio.
“It’s a little difficult to consider the price / earnings ratio even for this year. Estimates will decline, they are still too high, ”said James Reagan, director of research for welfare management at DA Davidson.
“It’s just so hard to even understand what the impact will be.”
The average profit forecast for the S&P 500 in 2020 suggests an increase of 2.7%, according to a report by Credit Suisse analysts on Wednesday. This indicator changes to a 0.7% decrease this year if we use only estimates updated for the previous seven days, Credit Suisse said, noting that “although we believe that estimates will continue to fall, the“ fresh ”figures better reflect current reality.”
BofA Global Research on Thursday lowered its forecast for the S&P 500, according to which earnings this year will fall by 15%.
The picture of economic damage may begin to clear up when companies begin reporting the results of the first quarter in mid-April.
Last week, FedEx and Marriott have already abandoned their forecasts for 2020 due to the uncertainty surrounding the epidemic.
The S&P 500 fell 28.8% after a record closing level on February 19 and reached its lowest level since early 2017 last week.
While the price-earnings ratio is not a fixed indicator, the scale of the fall has attracted investors who are looking for potentially profitable deals, especially those who can hold stocks for a long time.
For example, Brad Macmillan, director of investment at the Commonwealth Financial Network, pointed to a number of shares with higher dividends than the yield on 10-year US Treasury bonds.
“I don’t buy now, but now there is a powerful economic argument in favor of buying shares,” Macmillan said.
“We are approaching the point where stocks are already economically attractive, even if the emotional context can still lower them.”
Despite the fact that he is preparing to reduce profits this year, Reagan said that there are “pretty good chances” for growth in 2021.
“For a long-term investor who is trying to gain some confidence about investing now or needing to take a break, you can see the light at the end of the tunnel in terms of valuation if you look at 2021,” Reagan said.
The fall of the S&P 500 last week expanded to over 32%. Investing in stocks after falling 30% during the last two periods of the bear market, during the 2000 dotcom bubble and the 2008 financial crisis, “was a good buying opportunity,” said Lindsay Bell, chief investment strategist at Ally Invest.
For investors with at least a five-year investment horizon, now is “a reasonable time to start investing,” Bell said, adding that technology stocks look especially tempting.
“Expect that in the short term you can see their decline, but in the long run you will be rewarded,” Bell said.
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