MW U.S. stocks at their cheapest in nearly 18 months. Why earnings season holds the key on whether to buy.

By Isabel Wang

Earnings are taking on a higher level of importance for the stock market this time around

U.S. stocks are still trading at a pretty lofty level despite recent wild swings in the financial markets. Investors now wonder what it will take to bring valuation down to levels tempting enough to buy.

The forward price-to-earnings ratio (P/E) for the S&P 500 SPX - one of the most widely watched valuation metrics for stocks - fell to 18.01 on Tuesday. It was the lowest level since November 2023, and below its 10-year average of 18.63, according to Dow Jones Market Data (see chart below).

The forward P/E ratio for the large-cap benchmark index, calculated by dividing its current price by Wall Street analysts' consensus estimate for its earnings per share (EPS) for the next 12 months, had hovered above 20 for at least a year before President Donald Trump's sweeping tariffs this month ignited a trade war and sent the U.S. financial markets into a tailspin.

"Unfortunately, after a 12% pullback for the S&P 500 in four days, stock valuations look like they're just normal right now. We're not overvalued anymore... but there could certainly be much more pain ahead," said Paul Stanley, chief investment officer at Granite Bay Wealth Management.

"I think the challenge with valuation metrics right now is they all rely on some sort of projections for stock earnings, and I don't know how anybody can accurately project earnings with tariffs that are ranging from 10%-100%, changing every single day," Stanley told MarketWatch in a phone interview on Wednesday.

See: The S&P 500 is plunging after having its 10th best day ever. How to navigate volatility.

To be sure, full-year earnings expectations for the S&P 500 have softened slightly over the past month, with Wall Street now seeing the consensus EPS estimate at around $267.60, down from $271.05 in mid-March, according to FactSet data.

"This entire selloff has taken place in just a few trading days, so that's a pretty quick period of time for analysts to react, and I don't think they have enough information to do any upward or downward revision," Stanley said. "Until there's some sort of certainty on tariffs, I think it's very difficult to apply particular valuation to the stock market. "

Trump's aggressive and far-reaching tariff policy has triggered a trade war that many investors worry could plunge the U.S. and the world into a recession if he follows through with his plan. The president on April 2 announced a 10% universal tariff on imported products from all other countries, along with even higher "reciprocal" levies on dozens of trading partners including the European Union, China and Japan.

However, a week later, Trump suddenly backed away from parts of his plan, announcing a 90-day pause on the "reciprocal" tariffs and lowering the tariff rate to 10% for almost all nations, except for China. The White House confirmed on Thursday the total new levies on Chinese imports have reached 145%, marking the latest escalation in a trade war that has entrenched the world's two economic superpowers in a bitter standoff.

Meanwhile, China also unveiled retaliatory tariffs of 84% on imports of U.S. goods.

Strategists at BofA Securities estimate that the S&P 500's operating income may drop around 15% due to existing U.S.-China tariff conflicts.

"The impact will likely be mollified by accounting levers, pricing power and other factors, but could also worsen amid escalating tariffs," a team of BofA strategists led by Savita Subramanian, equity and quant strategist, said in a Thursday client note.

See: First-quarter earnings will be all about tariffs and the economic outlook. But are forecasts worth anything?

What to look for in this earnings season

That's why the first-quarter earnings season is so important, as investors can gauge what American companies have to say about their outlooks as widespread tariffs could heavily weigh on corporate bottom lines due to changes in import costs, supply chains and consumer demand.

"Earnings season is always important, but it takes on a higher level of importance this time around," said Chris Fasciano, chief market strategist at Commonwealth Financial Network. "It will be interesting to hear what their [companies'] view is going forward, and how that translates to guidance, because if the earnings have to come down, then the P/E ratios could be reflective of the current situation," he told MarketWatch via phone.

It's worth noting that the uncertainty around Trump's tariffs could cause some companies to "shut down guidance," which may hurt their stock prices, the BofA strategists said.

"Companies that regularly guide have traded at a premium to those that don't," Subramanian and her team wrote. "During COVID, we saw a shutdown in information - only 10% of companies issued annual guidance in the second quarter of 2020, down from an average of 40% in the four quarters prior."

The first-quarter earnings season is set to officially kick off on Friday, with major financial institutions like JPMorgan Chase & Co. $(JPM)$, Wells Fargo & Co. $(WFC)$, Morgan Stanley $(MS)$ and BlackRock Inc. $(BLK)$ reporting before the open.

Equity-risk premium at 2-year low

A look at other stock-valuation metrics also shows that U.S. equities have appeared cheaper than they used to be, but the seemingly endless market volatility could easily muddle the picture.

The U.S. equity-risk premium - or the gap between stocks' earnings yields and that of 10-year Treasury yields - on Monday stood at 1.461, its highest level since June 2023, according to Dow Jones Market Data.

A higher equity-risk premium typically means the additional reward for owning risky assets like stocks over ultrasafe assets such as U.S. government debt is increasing as stocks become cheaper and Treasury yields fall.

However, that positive outlook for stocks was quickly undermined by a sharp selloff in the Treasury market on Wednesday, after Trump's widespread "reciprocal" tariffs took effect. The U.S. 10-year Treasury yield BX:TMUBMUSD10Y, which moves inversely to bond prices, rose as much as 65 basis points in just four trading days through Wednesday, after briefly touching 4.509% overnight. As a result, the equity-risk premium for the S&P 500 fell to 0.658 on Wednesday, according to FactSet data.

More on bond-market selloff: Bond-market chaos is fueling concerns about a crisis. Here's what you need to know.

U.S. stocks fell sharply lower on Thursday, giving back much of the gains from the historic rally seen in the previous session. The Dow Jones Industrial Average DJIA fell more than 1,000 points, or 2.5%, while the S&P 500 was down 3.5% and the Nasdaq Composite COMP tumbled 4.3%.

- Ken Jimenez contributed

-Isabel Wang

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April 10, 2025 16:20 ET (20:20 GMT)

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