Cedar Grove Capital Management
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The Real Reason The Stock Market Is Down

The Real Reason The Stock Market Is Down

P/E multiple contraction is the main driver of falling share prices.
First reported on MarketWatch.
  • On average over the past century, according to an analysis conducted by Ned Davis Research, the S&P 500 has performed better when its EPS was lower than a year previously — not higher.

  • The S&P 500’s best quarterly returns in the past have come when its trailing four-quarter EPS were between 20% lower and 5% higher than where they were one year prior.

  • With the exception of quarters in which EPS was more than 20% lower than a year earlier, there’s an inverse relationship between EPS growth and the S&P 500’s performance.

  • Even with companies’ recent reduced earnings projections, Standard & Poor’s estimates that the stock market’s trailing four-quarter EPS as of June 30 will be 28% higher than the comparable total on June 30, 2021.

  • Over the past year, the U.S. stock market’s P/E multiple (based on trailing 12 months’ GAAP EPS) has fallen to below 20 from more than 30. Had the multiple remained constant, the S&P 500 today would be 28% higher than a year ago. In fact, it is 6% lower.

  • So if earnings aren’t going down, then the P/E multiple is to blame which means there are some companies out there with strong earnings that you could pick up at a real bargain in this environment.

    Until next time,

    Paul Cerro | Cedar Grove Capital

    Twitter: @paulcerro

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    Disclosure: All information provided herein by Cedar Grove Capital Management, LLC (“Cedar Grove Capital”) is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. An offer or solicitation of an investment in a private fund will only be made to accredited investors pursuant to a private placement memorandum and associated documents.
    Cedar Grove Capital may change its views about or its investment positions in any of the securities mentioned in this document at any time, for any reason or no reason. Cedar Grove Capital may buy, sell, or otherwise change the form or substance of any of its investments. Cedar Grove Capital disclaims any obligation to notify the market of any such changes.
    The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of Cedar Grove Capital. The information in this material is only current as of the date indicated and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of Cedar Grove Capital which are subject to change and which Cedar Grove Capital does not undertake to update. Due to, among other things, the volatile nature of the markets, and an investment in the fund/partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal and tax professionals before making any investment.
Cedar Grove Capital Management
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