Quick Bites | Analysing market PE ratios and sector divergence

It is worth keeping a close eye on the market Price Earnings (PE) ratio now that the reporting season is behind us. The chart below shows the PE ratio at 14.5x, bang in line with its long term average. Of course, the outlook for earnings is crucial, forward-looking commentaries from reporting companies was less than enthusiastic, and with rates rising the pressure on profitability is increasing.


ASX Price Earnings versus Earnings Per Share

Source: Shaw and Partners


Perhaps more interesting is looking under the hood at the market sectors which are showing a high degree of divergence. Defensive stocks are at a fairly high PE ratio of 22.9x, indicating that they are a favoured area of investment at a time of general uncertainty.

Overseas growth stocks have been even more highly bid (think of a company like CSL) at a multiple of 34.1x, able to grow in a resilient fashion and set to benefit from the weakening AUD. Resources are at a relatively sober multiple of just 12x, which reflects high commodity prices over the last few reporting periods, but which are now probably past their peak.


Sector PEs

Source: Shaw and Partners


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