There is a rising trend — especially in the telecommunications, utilities, and REITs sectors — of selling off non-core assets and using the proceeds to reduce debt. Rising long-term interest rates are likely to accelerate this trend.
Debt reduction reduces funds available for stock buybacks. This chart from S&P Dow Jones Indices shows buybacks on the S&P 500 have been declining since Q2 of last year.
Without buybacks, S&P 500 earnings growth is expected to follow declining year-on-year sales growth, removing the justification for high earnings multiples.
Price-earnings multiple for the S&P 500 is expected to decline towards its 50-year average of 16.4.
Conclusion
Debt reduction is likely to accelerate the decline of stock buybacks, eroding support for elevated price-earnings multiples.
Declining sales growth is likely to reduce earnings growth and further erode the justification for high earnings multiples.
The price-earnings multiple for the S&P 500 is expected to decline towards its 50-year average of 16.4 (based on highest trailing earnings).
Acknowledgements
- Eric Cinnamond at Palm Valley Capital
