...in a rising market not backed by fundamentals, as the equity market has increasingly become, the rise is largely attributable to PE multiple expansion. BUT note too that when market starts to weaken and in a less favourable economic environment, we typically see PE multiple contraction.
...so your stock could still be making decent profits, but its valuation could fall from here owing to PE multiple contraction. So don't ask why your company is making good profits and the price is falling seemingly without reason, when you never question when the stock price rises significantly even without remarkable profit growth.
...the question is if you want to wait until PE contraction commences.
-----------
In a note, JPMorgan strategists said the bulk of the equity performance this year, and in the past 18 months, was driven by multiple expansion. Globally, 12-month forward earnings are up only 7 per cent from the lows, in contrast to nearly 30 per cent price-to-earnings up move.
“Overall, if central banks turn out to be more dovish than currently projected, but without this being accompanied by growth disappointments, present equity multiples could be defended.
“However, if activity momentum, and in particular earnings delivery, disappoints, and central banks end up more reactive than proactive, then we think that equity multiples would need to fall.”
