The simplest way of explaining the selloff that has driven U.S. stocks closer to a bear market than any time in five years is that investors are adjusting to a new earnings reality. Based on share valuations, that reality is pretty bleak.
While equity analysts continue to predict a rebound in Standard & Poor’s 500 Index profit this year, stocks are no longer buying it. Evidence can be seen by plotting the forward price-earnings ratio against its historical average, a comparison that could be read as suggesting investors don’t see profits rising anytime soon.
