If Markets Are Up, Why Are Valuations Down?
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Your Money Briefing Money and market stories from the Wall Street Journal. I'm J.R. Whalen in New York. The market is within shooting distance of matching its January high, yet valuations are trending lower. We'll unlock the mystery in a moment. First, these money headlines. The producer price index, which is essentially the prices that businesses receive for their goods and services, was flat in July from a month earlier. When excluding food and energy categories, prices were up 0.1% in July from a prior month. But compared to a year ago, producer prices were up 3.3%. And disputes within U.S. trading partners of fading boost from fiscal stimulus and rising short-term interest rates are causing economists to revise their projections regarding U.S.
economic growth. Now, to be sure, consumer spending and business investment were strong in the spring, thanks in part to tax cuts that put more money in people's pockets and gave businesses a higher after-tax return on their investments. But many economists say beyond a year from now, they see rising chances of signals emerging that point toward recession. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. The markets are rising. In fact, the S&P 500 is about half a percent within its January high. But valuations are being held in check. To help us understand why, Wall Street Journal markets reporter Michael Worsthorn is here with us to discuss. So, Michael, amid all the volatility back in February, we thought valuations were low then.
They're even lower now. What's helping to push them in a downward direction?
A big part of the valuation squeeze that we're seeing currently right now has to do with just what the market did in January. The market rose so much so fast. Valuations just were sky high. And that all changed pretty quickly over the course of six, seven days as we got from January to February. Market fell into correction territory and you saw those valuations really get compressed. What's changed now is that that's all just continued throughout the rest of this year. We've moved from inflation concerns weighing on the market to now focusing on trade tensions. And in the middle of this, earnings has been playing in the backdrop.
Yeah, you write in your story that corporate earnings are giving stocks the appearance of being less pricey.
Corporate earnings so far this year have been phenomenal for companies. This is the third consecutive quarter where S&P 500 earnings have grown double digits from the year before. Now, what that's done basically is because stock prices haven't really moved all that much. I mean, we're now... just less than a percentage point away from that record high we last hit in January for the S&P 500. So amid that sort of stagnation amongst prices, earnings have just been phenomenal. So what that's done is just sort of when you're looking at valuations over the last 12-month period, those really great earnings are getting factored and pulling those valuations down even more. So now that we're into the second quarter,
We're fully through that second quarter earnings period. 24% year-over-year growth in profits, phenomenal for the S&P 500. A lot of investors are really happy. Valuations now look better than they have since mid-2017 at this point.
And there are some bargains to be had by investors, most notably in the healthcare and financial sectors.
That's where we've seen not a lot of attention in the stock market much of this year. Financials had been doing well soon after Donald Trump's election. But after that, they've sort of really petered out this year as we think about how inflation and interest rates are going to affect all those things. So you've seen the valuation compression that I was just mentioning earlier. really happened within the financial space, within healthcare. If you look at financials compared to most other S&P 500 sectors, the other 10 financials is by far one of the cheapest, especially compared to some of the pricier corners of the market that are trading multiples well above the S&P 500.
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