Earnings Multiple Expansion, QE and the Fed


Source: Bloomberg

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.

This post was originally published at The Big Picture and is reproduced here with permission.