By Noel Randewich
SAN FRANCISCO (Reuters) - Deep losses in Wall Street stocks and recent optimism about profit growth have left the benchmark U.S. S&P 500 index trading at its lowest price-to-earnings multiple in over a year.
While some traders warn that a "buy the dip" mentality may be coming to an end after a nine-year stock rally, analysts who remain bullish say U.S. economic growth remains on track after running at an annualized 2.6 percent in the last quarter of 2017.
Haverford Trust Chief Investment Officer Hank Smith said that despite the S&P 500's 4.5 percent slide over the past three days, he expects the index to end 2018 with a 12 percent gain.
"Fundamentals are strong: the rate of GDP growth is accelerating here and abroad; corporate profit growth is accelerating here and abroad," Smith said.
The S&P 500's deep loss over two days through Monday left it priced at 16.9 times earnings expected for the next four quarters, its lowest level since November 2016, according to Thomson Reuters I/B/E/S. Investors use earnings multiples to judge whether a stock looks cheap or overvalued.
(Graphic: S&P 500 and forward PE - http://reut.rs/2BHl6P3)
Prior to the Wall Street selloff that began last Friday, the S&P 500 was trading at 18.2 times expected earnings which was pricey compared to its 10-year average of 14.5. In December, the S&P 500's forward PE reached as high as 18.9 before analysts began to increase their estimates for companies reporting their fourth-quarter results.
Wall Street's largest companies are not the only ones to have seen their earnings valuations decline in recent sessions. The S&P 600 index of small-capitalization U.S. companies ended Monday at 18.2 times expected earnings, its lowest level since before August last year, which is the most recent data collected by Thomson Reuters I/B/E/S.
(Graphic: S&P 600 and forward PE - http://reut.rs/2Bgxe8q)
Although Wall Street's recent selloff accounts for part of the recent dip in the S&P 500's earnings valuation, analysts' earnings estimates for companies have also been steadily rising, fueled by corporate tax cuts passed by the U.S. Congress in December as well as by an improving global economy.
S&P 500 components are expected by analysts to grow their earnings per share in 2018 by 18.4 percent. At the start of January, analysts estimated that S&P 500 EPS would rise 12 percent in 2018.
(Graphic: S&P 500 2018 EPS growth expectations - http://reut.rs/2BIAomq)
(Data for all graphics provided by Thomson Reuters I/B/E/S)