The future is what you make it in the market
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Illustration: Brendan Lynch/Axios
Wall Street is worried about valuations, a measure of how expensive an asset is. One solution could be extending the time horizon for company earnings projections to 36 months from the current 12 months.
Why it matters: It would be a way to change the numbers without anything fundamentally changing.
What they're saying: "Eventually Wall Street is going to justify the valuations (on hot tech stocks) by extending its duration on its valuation metrics," José Torres, senior economist at Interactive Brokers, tells Axios.
- The S&P 500 is now trading at 23 times forward earnings, compared with a historical average of 18 times earnings. "Have a three-year horizon, and then all of a sudden, the valuations make sense," Torres says.
Reality check: Changing something like valuation timelines may actually make sense for the modern investor.
- Strategists and portfolio managers regularly point to the fact that tech valuations are always overstretched, but these names tend to grow into their valuations over time.
- Adjusting the forward earnings time horizon could allow for it to be more clearly reflected in one of the most used metrics for evaluating any given security.
Thought bubble: My mentor, who taught me how to cover markets, once told me "data doesn't lie unless you make it."
- Changing the forward earnings timeline could be a way to massage the data into a more palatable story for investors, or it could offer a more realistic view on how Wall Street values stocks today anyway.
