No amount of uncertainty and bad news seems to be able to keep the financial markets down for long. Surprisingly, this market strength comes as expectations for earnings growth have persistently disappointed for years. Because earnings are the most important driver of stock prices, this has left many investors lost and confused.
Many analysts attribute some of the counterintuitive trend to low inflation and depressed interest rates. But most analysts warn that it nevertheless has made for stretched valuations, which makes the market more vulnerable to a volatile sell-off.
Currently, the forward 12-month P/E ratio, which is based on forecasts for earnings growth in the next 12 months, is high at around 16.6. This is far above the 5-year average over 14.8 and the 10-year average of 14.3. This earnings season is important to the near-term future of the bull market, with valuations at least modestly elevated by most measures, earnings need to start to carry the weight if this bull market is to advance.
The Stoxx Europe 600 Index was little changed near a one-week high. The MSCI Asia Pacific Index rose 0.6% , after falling 1.1% in the last session. Deutsche Bank surged 6.4% in Germany on Friday, trimming its loss for the year 49%. Futures on the S&P 500 Index were steady ahead of the release of manufacturing gauges for the euro area and the U.S.
The weakening of the pound pushed more than 80 of the FTSE 100’s shares higher, with Royal Dutch Shell gaining 2.9%. The index was headed for its highest close since May 2015 and was about 2% away from the all-time high reached last year. The FTSE 250 Index of mid-cap companies and the FTSE Small Cap excluding investment trusts index also increased.Treasury 10-year note yields were at 1.61% after slipping two basis points last week. Japan’s was at minus 0.078% and Germany’s at minus 0.11%.