Earnings forecasts down and index up gives higher valuation.
Valued at forward earnings, the market is still not expensive, according to various equity strategists. Profits are expected to rise significantly in the future and the question is thus whether the forecasts will hold. The guessing game is far from flawless but analysts tend to be too optimistic and their estimates tend to be revised downwards. However, revisions tend to be positive when an economy is growing fast and especially during economic recoveries.
In all fairness, it should be noted that valuation based on forward earnings is one of very few valuation metrics that gives that the market maybe isn’t expensive in a historical perspective (but it’s not cheap either). Valuation on forward earnings.
Much of the expected increase in profits are based on further improvement in margins. But weak margins was the main reason for the disappointing Q4(13) results for Nordic companies. “This shows (again) that it is tough to keep margins when growth is low.” (Carnegie)
“Despite the valuation I remain positive for equities as an asset class. The best forecast at the moment is that profits should go up. If not then maybe it does not matter because the important thing is that the financial system continues to be flooded with money.” (Nordea)
Last year began with hopes and expectations of about 6% higher profits. The year ended with falling profits, down about minus 5%. At the same time the stock market exploded higher with roughly 23%. SEB has already concluded that the surge in Nordic Equity markets last year coincided with “One of the longest periods of earnings downgrade we have recorded.” (SEB)
Despite the negative revision trend, “We argue that supportive flows and lack of competitive alternatives, rather than valuation, would lift stocks further.” (SEB)