Source: Bloomberg



Over the years, I have described secular bull and bear markets as long periods of earnings multiple expansion and compression (respectively).

What is the impact of the Fed’s QE on the P/E compression that began when the market peaked in March 2000 or October 2007?

Dave Wilson of Bloomberg points us to Gina Martin Adams of Wells Fargo & Co. for the answer. Adams notes the parallels between QE2 and QE3 in terms of Standard & Poor’s 500 Index’s price-earnings ratio. Assuming the same patterns holds, current P/E expansion might be about a month or so away from peaking.

Adams suggest that the S&P 500’s higher valuation makes an argument for buying defensive stocks  those companies least affected by economic swings. She likes food, beverages and consumer staples, along with health care.




Fed-Induced Stock P/E Gains Seen Ending Soon
David Wilson
Bloomberg, 2012-10-17

Category: Bailouts, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “Earnings Multiple Expansion, QE & the Fed”

  1. Pantmaker says:

    I think they have the direction right. Companies have recently been cranking out record earnings. This is not sustainable. Math and history both seem to support this point. I disagree S&P valuations are a reason to buy defensive stocks now. They are a reason to lock in some profits…wait patiently and buy when valuations are more aligned with higher longer term equity returns. Keep it simple.

  2. vachon says:

    Maybe. But my fantasy league portfolio is loaded with 3x short etfs. I’ll probably put a way out of the money hedge on them tonight or tomorrow, but only for pro-forma purposes. The Cliff looms.

  3. Earlmun says:

    With the election less than a month away, it is highly unlikely the market will correct. Beyond the election and with the approach of the fiscal cliff, the market will most likely correct.

  4. Derektheunder says:


    those events coincide almost exactly to being a month from now.

  5. Concerned Neighbour says:

    This assumes it is even possible for markets to go down with central banks (they of the infinite money) actively cheering them higher. It would not shock me in the least if blue chips like PG have AMZN-like P/Es the way these markets are being so recklessly pumped.

    If earnings have in fact plateaud or have started heading lower, I’d love to know Mr. Bernanke’s target P/E. 15? 20? 25?

  6. socaljoe says:

    It should be noted that, unlike QE1 and QE2, QEternity does not have an end date.

    The FED wants higher nominal wealth (asset inflation) and I expect they will continue QE until they get it or the system blows up.

  7. b_thunder says:

    Other than “elevated asset prices” Ben Bernanke has nothing to show for his tenure.
    The P/E Peak may be just a month away, but Ben has 2 more years. Who’s to say that after he buys all treasurys and mortgages he won’t start buying AAA-rated companies? or S&P5000 ETFs?

    Ben may not be a great forecaster (the subprime will be contained) but he’s VERY creative…

  8. JerryC says:

    Next year should be fun; perhaps the bear will return.

    On another subject, Think Tank (possibly other sections) at STILL broken. If you’re logged in, they sort of work, but they are just a pain on my mobile devices. This has been pointed out for several months, but either there is a web wacko who doesn’t know html from wifi, or it’s by design. Please deal with this. Thanks soooo much for the great site.

  9. Don’t foget Ritholtz rule of invesment number 2: Don’t make forecasts!

    If the forecast is right, market action will tell us. For those followers of the Dow Theory, and even those that merely use moving averages (although they are less responsive than the Dow Theory), we would see a bear market signal if markets are to go substantially low. Since the Dow Theory tends to be more responsive than moving averages, sell signals are flashed at ca. 10% from the top. Not so bad and in the meantime it allows the investor to participate in the trend until exhausted.

    Thus, the Dow Theory complies with the basic rule of investment: “Cut your losses short, let your profits run”. This is accomplished thanks to the Dow Theory trailing stops. More on them here:

    Under Dow Theory, we always know how much we stand to lose whereas the profits are open ended.

    However, it is always good to hear what learned people have to say. It helps us determine whether we are in the last phase of a bull market or in the beginning and whether there is head or tailwind. By factoring those factors in, we can better allocate funds between different asset classes.


  10. Pantmaker says:

    Re rule number 2: Don’t make forecasts!

    We are all making implied forecasts when we invest our money and place our trades. Everyone. I always thought this rule was a bit of an odd ball. There are of course folks that make forecasts and glorious charts without ever putting real money to work. I think this is fine too if it makes them happy.

  11. PatR says:

    As others have pointed out, QE3 is open-ended, and there is no limit to how much money the Fed is permitted to print. Therefore, the market P/E ratio will be whatever Bernanke says it will be. According to Bernanke, and his predecessor Greenspan, increasing asset prices are better for the economy than decreasing, so presumably Bernanke and his successors will keep pumping out QE to make the P/E ratio ever higher. 10, 15, 20, 25, 30, 35….. You get the idea.

    What will stop this? Eventually, consumer price inflation will grow to be high enough that it will catch up with asset price inflation, and overtake it. Once consumer price inflation has achieved enough momentum to last for many years, and the Fed is confident that the cumulative total inflation will be large enough to achieve the Fed’s goals, it will let the P/E ratio go down again.

    It will be a fun show to watch, if a little long. It’s a re-run of a show that last ran back in the 1960′s and 1970′s. This time it will run a little faster, though.

  12. algotr8der says:

    Beware of the ideas and our belief systems that become generally accepted principals. The markets don’t do what the Feds what it to do. People make decisions and things happen.

    Go examine the track record of the Fed or any other central bank going back 100 years. These institutions have NEVER been able to prevent contractions in economic output. NEVER. The Greenspan era began when the capacity of the world to take on loads of debt was still there. We all know how that ended for Greenspan. It always ends in disaster because these lunatics are obsessed with an ideology. It goes back to the definition of insanity – repeating the same thing over and over and over again while expecting a different outcome. 100+ years have shown us what that end outcome is.

    Don’t be the greater fool.

  13. Bill Wilson says:

    As many have pointed out, this QE3 is open ended, so it’s hard to compare it to QE2.

    However, we shouldn’t forget that QE2 ended with with a commodity price scare. Remember when Sarah Palin railed about inflation? I don’t believe there was inflation in the Spring of 2011, because there was no wage inflation. We did get high input costs which would have eventually destroyed profit margins and household budgets if the summer sell-off of 2011 had not occurred.

    The FED wants to create inflation right now. That means wages and home prices as well as assets. If the FED is successful in raising wages and home prices, I believe this asset price rally will last for some time. If commodity prices continue rise, but wages and home prices do not. I expect an end to QE3, and an ugly sell off.

  14. Concerned Neighbour says:

    I agree Bill Wilson. Just because I personally am of the opinion that these markets are artificially inflated doesn’t mean I will depend on them being always so.

  15. Mike C says:

    We are all making implied forecasts when we invest our money and place our trades.

    Not sure about this. I think there is a big difference between making a specific forecast and placing a positive expectancy bet. I think effective trading and investing is about making a series of positive expectancy bets, not specific forecasts. If I have a jar with 8 red marbles and 2 blue marbles, and I randomly draw a marble any single draw could be red or blue. It would be silly to forecast a single draw, but if I can get a 1 to 1 payoff for betting red, I’ll keep doing that over and over and over.

  16. [...] Quantitative Easings’ effect on earnings multiple expansion | Bloomberg Overlaying SPX’s PE multiple expansion post-QE2 (starting Jackson Hole August 2010) v. post-QE3 (starting June 2012), Bloomberg points out an analogue. QE2′s precedent is a neat arc (multiple expansion for 6 months, then contraction thereafter) and QE3 is closely following that lead. [Seems like investors have all the confidence in the world at the outset that QEs will trickle down into the real economy, but after 6 months of futility, they abandon ship.] [...]