The euphoria with which investors in the U.S. stock market greeted the Federal Reserve's decision to stick with its easy-money policy has begun to evaporate, as the message the Fed was sending about a less-than-stellar economy sinks in.
An economy still in need of a safety net may be too weak to produce robust earnings growth, meaning that the Standard & Poor's 500 valuation, now at its most expensive on a price-to-earnings basis since 2010, becomes harder to justify.
The Standard & Poor's 500 is up 20 percent so far this year and hit new highs last week, boosting the index's forward p/e ratio to 14.94, its highest since early 2010. At that time, though, company earnings were improving more rapidly than now as business activity rebounded from the depths of the recession and financial crisis in 2007-2009.
Profit growth for 2013 is expected at about 6 percent, a far cry from the 31 percent achieved in 2010. That undermines the case for further gains in stock prices and has led some investors to consider reducing their earnings forecasts.
Source: Reuters
