Bar chart showing the peak to trough percent change in the S&P 500 Index around each recession since 1957 as well as the subsequent trough to peak percent change. Dotted lines represent the median peak to trough as well as trough to peak change. The median P/E drawdown associated with these recessions is -22% while the median P/E rebound is +54%. Multiples initially contract as prices drop faster than earnings before expanding as the early cycle recovery takes hold and prices rebound faster than earnings can recover.
Sources: Bloomberg and Wells Fargo Investment Institute, as of December 31, 2023. P/E represented by the S&P 500 Index trailing 12 months price-to-earnings ratio. Horizontal axis shows the recession years. Peak measured as peak the 12 months of the recession start date. Trough measured as trough within 6 months of recession end date. Following peak measured as peak within 12 months after trough. The S&P 500 Index is a market-capitalization-weighted index considered representative of the U.S. stock market. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Investing in stocks involves risk and their returns and risk levels can vary depending on prevailing market and economic conditions.
Key Takeaways
- We expect a price-to-earnings (P/E) contraction as economic growth slows.
- While multiples should contract as prices drop faster than earnings, P/Es should expand as the early cycle recovery takes hold and prices rebound faster than earnings can recover.