The Coming Earnings Season Will Determine Market Direction

A recent post on ValueWalk.com provided a nice summary of the current market valuation:

1. P/E (TTM) – Fairly Valued 15.0
2. P/E 10 year – Extremely overvalued 23.67
3. P/BV – xtremely overvalued - 3.68 (using numbers discussed above from April)
4. Dividend Yield – Indeterminate/ overvalued 1.72
5. Market value relative to GDP – Moderately Overvalued 97.1
6. Tobins Q – Extremely overvalued 1.19
7. AAII Sentiment – Average

My takeaways are

• 1 & 5 indicate that the valuation is supported by growth expectation
• 7 signals that investors are not euphoria about their growth expectation
• 2, 3, & 6 simply mean that inflation is looming

Thus the coming earnings season is highly important because market valuation is supported by growth expectation. If corporate earnings can keep the current pace, i.e., FPE = PE, then the market is fairly valued and will be range bounded after it. If corporate earnings will fall or rise, so will the market.

It is healthy that investors' sentiment is at average level right before the earnings season. It appears that investors didn't commit to a big bet yet, meaning the market may not move drastically if there is any surprise.