Falling values ​​sink prices | News, Sports, Jobs

Stock market valuations are falling rapidly, giving investors a potential opportunity to buy stocks that might have been overvalued just a year ago.

Take the industrial example Caterpillar Inc. Last year, the Illinois-based heavy machinery maker was trading at 27 times its earnings, which is the price paid by investors for a Caterpillar stock. was 27 times its earnings per share, a valuation known as the price-to-price ratio. earnings. The S&P 500’s overall price-to-earnings ratio hit its highest level in at least two decades at the start of 2021.

Today, with inflation at its highest level in 40 years and the Federal Reserve raising interest rates at the fastest rate since Pink Floyd “The wall” was in the charts, investors have doubts about how much to pay for the shares.

This week, Wall Street was valuing Caterpillar stock at just 17 times earnings, a steep decline also seen by retail giant Target and other stocks.

The ratio of stock prices to a company’s earnings is now near a 10-year average for the broader S&P 500 index.

“There are reasonable values ​​there,” said Brad McMillan, chief investment officer for Commonwealth Financial Network. “Investors need not be terrified at this point as long as they realize the volatility is not going away.”

The decline in valuations came from two fronts throughout the year. Earnings growth has steadily declined for the entire S&P 500 since the start of the year. Corporate valuations have also been hit hard by the Fed’s aggressive policy of raising interest rates in its effort to slow economic growth and bring inflation under control. Higher interest rates generally make equities less attractive, while increasing returns in areas of the market traditionally considered less risky, such as bonds.

The US economic outlook remains highly uncertain amid stubbornly high inflation that is squeezing consumers and businesses, while the Federal Reserve is aggressively raising interest rates. The latter has made borrowing more difficult for consumers and businesses, while increasing the possibility that the economy will slide into recession.

Analysts said valuations could fall further in the coming months. Stubbornly high inflation has slowly compressed consumer spending and business costs throughout 2022.

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