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Earnings Multiple Expansion, QE & the Fed

Posted By Barry Ritholtz On October 18, 2012 @ 11:30 am In Bailouts,Federal Reserve | Comments Disabled

[1]
Source: Bloomberg [2]

 

 

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.

 

 

 

Source:
Fed-Induced Stock P/E Gains Seen Ending Soon [2]
David Wilson
Bloomberg, 2012-10-17 
http://www.bloomberg.com/news/2012-10-17/fed-induced-stock-p-e-gains-seen-ending-soon-chart-of-the-day.html


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[2] Bloomberg: http://www.bloomberg.com/news/2012-10-17/fed-induced-stock-p-e-gains-seen-ending-soon-chart-of-the-day.html

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