vrijdag 8 november 2013

Consumer Sentiment Index Vs. S&P 500

There is a correlation between consumer sentiment and the forward P/E ratio on the S&P 500. Investors will be willing to pay increasing multiples if they are confident that the future streams of earnings are sustainable and forecastable.

If we know that forward earnings are a measure of how confident investors are to buy stocks compared to the earnings of the stocks, then we know that the forward P/E ratio is correlated to the S&P 500 itself. By deduction, the consumer sentiment index is correlated to the S&P 500.

The consumer index (blue chart) is a leading indicator for economic trends so if we see a drop in the blue chart, the red chart (S&P 500) will go down a few months later.

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