Stocks are On Sale (October 2022 Dynamic Tilt)

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In addition to regularly rebalancing client portfolios, we analyze future price-to-earnings ratios (called “forward P/E ratios”) monthly to overweight sectors where earnings appear cheap and underweight those where earnings appear expensive based on historical valuations. This strategy of tilting towards cheaper funds and away from expensive ones we call Dynamic Tilt.

The calculation of a price-to-earnings ratio is very simple. The current price per share of the security in the market is divided by the reported earnings per share of the underlying company or companies. In forward P/E ratios, the earnings is the forecasted next 12-months of earnings.

Because P/E is price divided by earnings, the forward P/E score can be thought of as how many dollars you need to pay in order to purchase an expected $1 of earnings over the next twelve months. A high forward P/E means you are paying more for those earnings. A low forward P/E means that you are paying less for those earnings.

Now, there is more to picking a good sector than just its cheapness. The cheapest produce in the grocery store today may be turnips, but that’s not a great purchase when you are trying to make a fruit salad. Some sectors behave differently than others, like Consumer Staples and Technology. For this reason, we like to compare the current forward P/E ratio to the historical average forward P/E ratios for the same sector.

This quarter, when we compare the September 30, 2022 forward P/Es for all the sectors we track, we see that almost every sector is either fairly valued or undervalued.

In U.S. Stocks, large cap, mid cap value, and small cap value all appeared undervalued compared to historical averages.

Sept 30, 2022 forward P/E Interpretation
U.S. Large Cap 15.91 LOW
U.S. Mid Cap Value 11.10 LOW
U.S. Small Cap Value 10.72 LOW
U.S. Technology 19.00 FAIR
U.S. Healthcare 18.12 FAIR
U.S. Consumer Staples 18.33 FAIR


In Foreign Stocks, Austria, Canada, Chile, Norway, and United Kingdom appeared the most undervalued compared to historical averages.

Sept 30, 2022 forward P/E Interpretation
Australia 12.46 FAIR
Austria 6.19 LOW
Canada 10.65 LOW
Chile 7.56 LOW
Denmark 17.34 FAIR
Emerging Markets 10.20 FAIR
Finland 13.69 FAIR
Ireland 11.81 FAIR
Korea, South 7.83 FAIR
Netherlands 15.64 FAIR
New Zealand 23.91 FAIR
Norway 7.32 LOW
Singapore 14.78 FAIR
Sweden 13.53 FAIR
Switzerland 14.93 FAIR
Taiwan 10.10 FAIR
United Kingdom 8.62 LOW


This undervaluation of U.S. and foreign stocks can be thought of stocks being on sale.

As David Marotta describes in his 2008 article “When Will The Markets Stop Dropping?,” it is a good time to buy when it seems like every other house is having a yard sale. Meanwhile, selling your assets just because your neighbor is having a sale is a foolish move. The same is true in the markets.

Stocks are on sale; there is no reason for you to sell right now.

Photo by Markus Spiske on Unsplash

Follow Megan Russell:

Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.