Stock prices rose, so why did valuation multiples fall?
When you see U.S. stocks rising and say, “There’s too much money around, pushing valuations higher,” you may be conflating two variables.
The Fed’s September meeting minutes, released early this morning Beijing time, noted that the head of the trading desk believed stock prices had risen year to date through the meeting on the back of strong actual and expected corporate earnings, while price-to-earnings multiples had declined. This describes the market at that time, not the state of every stock today.
Let’s break it down with a hypothetical example: a stock is priced at 100 yuan and earns 5 yuan per share, giving it a P/E ratio of 20. Later, the stock rises to 110 yuan while earnings increase to 6 yuan per share. The share price is up 10%, but the P/E ratio has fallen to about 18.3.
So, a record-high price and investors being willing to pay more for each yuan of earnings don’t necessarily go hand in hand. Upward revisions to earnings expectations can partly offset valuation contraction; if those earnings later fail to materialize, that support will weaken too.
When trading, I look at earnings changes, valuation multiples, and financing costs together. Focusing only on whether an index is up or down can lead you to mistake stronger corporate earnings for a broad easing of financial conditions.
You can’t directly apply the per-share earnings formula for publicly listed companies to BTC, ETH, or SOL either. First, we need to identify what’s driving U.S. stocks higher, then assess whether there are common factors that could spill over into the crypto market.
The image is a reference photo of the Federal Reserve building.
$BTC $ETH $SOL
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When you see U.S. stocks rising and say, “There’s too much money around, pushing valuations higher,” you may be conflating two variables.
The Fed’s September meeting minutes, released early this morning Beijing time, noted that the head of the trading desk believed stock prices had risen year to date through the meeting on the back of strong actual and expected corporate earnings, while price-to-earnings multiples had declined. This describes the market at that time, not the state of every stock today.
Let’s break it down with a hypothetical example: a stock is priced at 100 yuan and earns 5 yuan per share, giving it a P/E ratio of 20. Later, the stock rises to 110 yuan while earnings increase to 6 yuan per share. The share price is up 10%, but the P/E ratio has fallen to about 18.3.
So, a record-high price and investors being willing to pay more for each yuan of earnings don’t necessarily go hand in hand. Upward revisions to earnings expectations can partly offset valuation contraction; if those earnings later fail to materialize, that support will weaken too.
When trading, I look at earnings changes, valuation multiples, and financing costs together. Focusing only on whether an index is up or down can lead you to mistake stronger corporate earnings for a broad easing of financial conditions.
You can’t directly apply the per-share earnings formula for publicly listed companies to BTC, ETH, or SOL either. First, we need to identify what’s driving U.S. stocks higher, then assess whether there are common factors that could spill over into the crypto market.
The image is a reference photo of the Federal Reserve building.
$BTC $ETH $SOL
Tap my profile picture to view my live trading account