Quick Take: A Multiple Expansion-Driven Rally
Global equities rallied further in Q4 2019 even as earnings continued to decline.
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For 2019 whole, in fact, equity returns were attributable to multiple expansion rather than improving fundamentals. (See returns decomposition, below.)
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We’ve observed similar patterns historically when the market has rebounded from economic downturns before actual earnings have caught up, e.g., the recovery phase after the GFC and the TMT bubble. What makes the current circumstance noteworthy is that it wasn’t preceded by such severe economic deterioration.
Growth has benefited more than Value; monitor spreads.
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Multiple expansion also explains Growth’s outperformance relative to Value in 2019, also evident in the decomposition. What’s more, Growth stock forward PEs show that the market is pricing in above average earnings growth while Value forward PEs are consistent with historical norms (below). Value stocks outside the U.S. trade at greater discounts relative to their Growth counterparts.
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In our recent piece, “Returns to Value: A Nuanced Picture,” we noted that P/E-based spreads were not as stretched as P/B-based spreads as of year-end 2018. But they are worth monitoring should the multiple expansion-driven rally continue.
2019 Returns Decomposition for MSCI World
Current vs. Historical Forward P/Es
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