Expand chart
Data: Factset; Chart: Lazaro Gamio/Axios

Axios told you on Tuesday that 2018 has been "brutal" for the stock market, and Bloomberg's Stephen Gandel followed up on Wednesday by saying that it's even worse than that. Above is a chart of one key valuation metric: the stock market's price-to-earnings ratio.

For the first year of the Trump presidency, valuations rose steadily. But in his second year, they've imploded and are now well below their level when he took office. The S&P 500 now trades at 17.5 times its earnings over the past 12 months. That's down 25% from the peak of 23.4 in January.

The big picture: This is not bad news. In many ways, it's exactly what you'd expect from a president who came in to office promising a large corporate tax cut.

  • Lower corporate taxes mean higher corporate earnings. Therefore, as the tax cut becomes increasingly likely, stock prices rise in anticipation of those higher earnings. That drives p/e ratios higher.
  • Once the tax cut arrives, earnings go up, in line with expectations. But the higher earnings mean a higher denominator for p/e ratios and therefore lower multiples.

The bottom line: When the market trades on a trailing p/e of 17.5, it no longer looks particularly frothy. Stock prices can certainly fall from these levels, especially if a tight labor market forces companies to pay their workers more and eats into profit margins. But most Americans would prefer higher wages to higher stock prices.

Go deeper

Ben Sasse emerges as GOP Trump critic ahead of November

Sen. Ben Sasse walks to the Senate from the subway to vote in June. Photo: Bill Clark/CQ-Roll Call via Getty Images

Sen. Ben Sasse (R-Neb.) has dialed up his spicy slams of President Trump, including this swipe at yesterday's signing ceremony: "The pen-and-phone theory of executive lawmaking is unconstitutional slop."

Why it matters: Trump increasingly looks — to business and to fellow Republicans — like a loser in November. So they're more likely to create distance to save their own skins. Sasse also won his May primary, further freeing him.

Pelosi: "States don't have the money" for Trump's unemployment order

House Speaker Nancy Pelosi claimed on "Fox News Sunday" that states don't have the funds to comply with the executive order President Trump signed on Saturday, which requires them to cover 25% of an additional $400 in weekly unemployment benefits.

Why it matters: Many state and local governments have had their budgets devastated by the economic impacts of the coronavirus, which have caused expenses to soar and revenues to plunge.

Kudlow says he regrets claiming Trump couldn't use executive order for unemployment

White House economic adviser Larry Kudlow said on CNN's "State of the Union" Sunday that he regrets suggesting this week that unemployment benefits can only be extended by Congress.

Why it matters: President Trump's decision to bypass Congress to sign four executive actions, including one that provides $400 per week in extra unemployment benefits, has prompted outcry from Democrats and even some Republicans who believe he is overstepping his constitutional authority.