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A Bear Market in P/Es: Intellectual Capital Blog

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54 views2 pages

A Bear Market in P/Es: Intellectual Capital Blog

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kolo
Copyright
© © All Rights Reserved
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For UBS marketing purposes

The magnitude of the decline in the P/E multiple over the last nine months is unusual. (keystone)

Intellectual Capital Blog

A bear market in P/Es


09 November 2018, 1:54 pm CET, written by UBS Editorial Team

One of the most striking developments in equity markets this year has been the fairly rapid decline in
valuations.

From the S&P 500 high in late January to the low in late In our view the bull market remains intact driven by
October, the S&P 500 P/E (based on earnings over the prior continued favorable access to capital, limited risks of
12 months) fell by 22%. As a reminder, a decline of more a significant overshoot on inflation, and reasonable
than 20% in stocks meets the common definition of a valuations. This still supportive backdrop and the bullish
"bear market." So what are the implications of this bear signal from the bear market in P/Es were part of the reasons
market in P/E multiples? we increased our allocation to stocks yesterday in our
• This is rare. The magnitude of the decline in the P/ tactical asset allocation in an update of our House View.
E multiple over the last nine months is unusual. Since
Main contributor : David Lefkowitz
1980, a decline of more than 15% over a nine month
period only happens 10% of the time. For more, read A bear market in P/Es, 8 November 2018.
• And it is bullish. But when this does happen, stocks
tend to generate solid returns going forward. Not only
that, but the likelihood of generating a positive return
is very high. Over the next twelve months, stocks are
up 88% of the time.
• Why is it bullish? It’s likely that such a rapid
compression in the P/E multiple indicates that market
sentiment reflects too much caution. That certainly
resonates today. There are plenty of things to worry
about: trade, overseas growth, Fed tightening. But
based on the compression in the market multiple, it
appears that investors are already expecting some bad
outcomes.
UBS Investment Insights
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