Some investors like to ride momentum, and the biggest question is always how long big market moves will last. Over the past year, the U.S. stock market as a whole has become more expensive on a price-to-earnings basis. So this might be a good time to dig a little deeper into this commonly used valuation metric and highlight stocks that combine momentum with declining P/E ratios.
A stock’s forward P/E ratio is its price divided by the consensus estimate of earnings per share, among analysts working for brokerage firms, for that company over the next 12 months. It can be useful to see how a stock’s price is moving relative to rolling profit estimates.
Let’s start with the S&P 500
.
The index was up 30% for a year through Friday, excluding dividends. But the 12-month weighted consensus EPS estimate among analysts surveyed by FactSet was up just 10% from a year earlier. As such, the index’s forward P/E ratio increased to 20.7 as of Friday’s close, up from 17.6 a year earlier. This is one reason why some investors consider the U.S. stock market relatively expensive overall. Compare the index’s current forward P/E ratio of 20.7 to a five-year average of 19.4, a 10-year average of 18 and a 15-year average of 16.3, according to FactSet.
Among the 11 sectors in the S&P 500, only one sector has seen its 12-month EPS consensus estimate rise faster over the past year than its weighted stock price. Here are the sectors listed in alphabetical order, with the full index below:
| Sector or index | P/E ahead | Forward P/E one year ago | Change in share price | Change in EPS estimate |
|
Communication services |
18.4 |
15.1 |
59% |
30% |
|
At the discretion of the consumer |
26.4 |
25.1 |
34% |
27% |
|
Basic necessities |
19.9 |
19.6 |
6% |
5% |
|
Power |
12.2 |
10.1 |
2% |
-16% |
|
Financial |
15.2 |
13.6 |
13% |
2% |
|
Health care |
19.3 |
17.0 |
15% |
1% |
|
Industrial |
20.9 |
19.4 |
20% |
11% |
|
Information Technology |
28.5 |
22.1 |
62% |
25% |
|
Materials |
20.5 |
17.5 |
7% |
-9% |
|
Real estate |
17.7 |
17.1 |
5% |
2% |
|
Utility |
15.1 |
16.8 |
-4% |
7% |
|
S&P500 |
20.7 |
17.6 |
30% |
10% |
|
Source: FactSet |
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As of Friday, forward P/E ratios had risen from last year for all sectors except utilities. This was the only sector whose weighted price fell compared to the previous year. Meanwhile, this sector’s weighted 12-month rolling EPS estimate rose 7%.
Screening the S&P 500 for earnings that have earnings estimates rising faster than stock prices
The best-known example of a hot stock with a consensus estimate of 12-month EPS rising faster than the stock price is Nvidia Corp. NVDA.
According to FactSet, the stock was up 262% for a year through Friday, while the rolling consensus estimate for 12-month EPS was up 461% from a year earlier. This caused Nvidia’s forward P/E to decline to 32.4 from 50.1 during the 12-month period.
Here’s a look at Nvidia’s P/E movement compared to those of other semiconductor makers.
Opinion: Nvidia’s next mission is to write even more financial history
It turns out that among the S&P 500, there are 25 stocks that are up at least 15% over the past year, while their consensus EPS estimates have risen faster. Here they are, sorted by price increase:
| Agency | Ticker | P/E ahead | Forward P/E one year ago | Change in share price | Change in EPS estimate |
|
Nvidia Corp. |
NVDA |
32.4 |
50.1 |
262% |
461% |
|
Uber Technologies Inc. |
UBER |
59.4 |
2,084.2 |
146% |
8.515% |
|
Amazon.com Inc. |
AMZN |
40.8 |
54.5 |
93% |
158% |
|
General Electric Co. |
GE |
33.0 |
38.4 |
89% |
120% |
|
Royal Caribbean Group |
RCL |
12.2 |
18.6 |
74% |
166% |
|
Intel Corp. |
INTC |
29.0 |
36.5 |
73% |
118% |
|
Carnival Corp. |
CCL |
14.6 |
69.9 |
51% |
623% |
|
Axon Enterprise Inc. |
AXON |
68.5 |
73.9 |
42% |
53% |
|
Live Nation Entertainment Inc. |
LIE |
49.8 |
69.5 |
35% |
89% |
|
Equinix Inc. |
EQIX |
76.8 |
79.9 |
33% |
39% |
|
Progressive body |
PGR |
20.1 |
20.9 |
32% |
37% |
|
Norwegian Cruise Line Holdings Ltd. |
NCLH |
14.5 |
14.9 |
27% |
32% |
|
Welltower Inc. |
WELL |
70.7 |
92.1 |
27% |
65% |
|
Xylem Inc. |
XYL |
30.4 |
31.0 |
27% |
29% |
|
Arch Capital Group Ltd. |
ACGL |
10.8 |
11.7 |
23% |
33% |
|
Allstate Corp. |
ALL |
12.0 |
15.8 |
22% |
60% |
|
Textron Inc. |
TXT |
13.9 |
14.1 |
21% |
23% |
|
Fedex Corp. |
FDX |
11.9 |
12.8 |
21% |
30% |
|
Qorvo Inc. |
QRVO |
15.9 |
22.7 |
19% |
70% |
|
Merck&Co. |
MRK |
14.5 |
14.9 |
19% |
22% |
|
Travelers Cos. |
TRV |
11.8 |
12.5 |
19% |
27% |
|
Monster Beverage Corp. |
MNST |
31.5 |
32.0 |
19% |
21% |
|
Molson Coors Beverage Co. Class B |
FAUCET |
10.9 |
12.9 |
17% |
39% |
|
T-Mobile USA Inc. |
TMU |
17.2 |
18.7 |
16% |
26% |
|
CarMax Inc. |
KMX |
22.1 |
23.3 |
15% |
22% |
|
Source: FactSet |
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As always, if you are considering an individual company for investment, you should do your research and form your own opinion on that company’s likelihood of remaining competitive at least into the next decade. One way to start this process is to click on the tickers.
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on MarketWatch’s stock quotes page.
Not to be missed: Want your stock picks to beat index funds? Look at companies with a key metric.