Stocks Just Hit Their Cheapest Level in Years
This article was originally published on this site
I have some fantastic news for you…
Today, stocks are selling at 2015 prices.
If you thought you missed the great run-up in stock prices over the past two years, think again…
Now you have a second chance.
I’m not kidding…
I don’t mean that the major stock indexes are at their 2015 levels. We know that’s not true.
So let me explain to you what I do mean. It’s pretty simple…
Last month, stocks fell further than 10% for the first time in years.
But it’s not just that prices fell. There’s more to it than that…
Stocks are now at valuations we haven’t seen in years.
This creates opportunity. And it’s a good sign for our “Melt Up” investments in the coming months.
Stocks haven’t been cheap in a while. That’s no surprise after a nine-year stock market boom. But market valuations just got a double whammy…
First, stocks corrected, as I explained above. A 10% decline – all else being equal – means stocks are 10% cheaper than they were before. The market has come back a bit since the February bottom, but it’s still below all-time highs.
But that’s not the only thing that happened…
On December 22, President Donald Trump signed a tax overhaul into law. It dramatically lowers corporate tax rates. And that has led to much higher earnings estimates for 2018.
Bloomberg now estimates that S&P 500 Index earnings will grow 27.3% over the next 12 months…
That’s a huge growth number. And a good chunk of it will likely come as a short-term bump, thanks to the tax overhaul.
Thanks to these two factors, stocks just hit their cheapest level in years, based on forward price-to-earnings ratios (P/E), which take current stock prices and divide them by next year’s earnings estimates.
You can see the big change in the chart below. Take a look…
In short, valuations fell by 16% in just a few weeks. And they’re still cheaper today than they’ve been in a year…
No, the market isn’t dirt-cheap today. A forward P/E in the 17 range is still historically expensive. But the market is a better value today than we’ve seen in a while. You have to go back to 2015 to find a time when the forward P/E ratio averaged 17 for the year.
And that’s a good sign heading into the Melt Up.
You see, as regular readers know, I’ve been calling for a final blastoff in stock prices… a “Melt Up” before the market has its “Melt Down.”
I expect the market will rise to much higher valuations in the Melt Up. During the tech boom, the S&P 500’s P/E ratio soared above 30.
Those valuations can certainly happen again. And if they do, anyone buying today – after a big step down in valuations – has major upside.
The correction was scary and painful. But today, you can buy into stocks at 2015 valuations. This sets us up for significant upside potential if I’m right about the Melt Up.
So my advice remains the same… Stay long stocks.