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