Stock traders haven’t been this optimistic about profits on the eve of a quarterly earnings season since the summer of 2004.
When an investor buys a stock or a fund of stocks, he is buying the hope of future profits. That hope — and reality — drives stock prices. And lately, investors have been willing to pay up for the prospect of profits.
A forward price-to-earnings ratio compares a stock or stock index’s current price to the per share profits it’s expected to produce over the next 12 months. It acts as a gauge of how expensive stocks are.
Using this indicator, the Standard & Poor’s 500 index is more expensive than its 20-year average. It’s not in the late 1990s, internet bubble range, though.
Wells Fargo will help begin the first-quarter earnings season and provide the period’s first test of investors’ hope for profits.
After a blistering, post-Trump-election rally, the financial sector of the market has been the worst performer over the past month.
Wells Fargo, the largest mortgage lender in the U.S., sees the week ahead as an opportunity to regain credibility following a scandal created by the revelation it had been opening bank and credit card accounts customers didn’t want or ask for. The bank’s stock has rallied more than 20 percent since the scandal broke in September and the bank has so far paid $300 million in fines and settlements over the unauthorized accounts.
Profits may affirm the hopes of investors but they don’t excuse bad behavior.