Episode summary
Higher rates are causing compression in P/E multiples, says Morgan Stanley's Andrew Slimmon
Summary
Andrew Slimmon argues that the market’s recent weakness is less about earnings and more about valuation pressure from higher rates. He says the Fed’s tightening is driving P/E multiple compression, and that the key question is how fast rates rise from here. In his view, Wall Street is currently pricing in about three hikes, but the eventual path will determine whether multiples keep falling or stabilize.
He points to history to suggest the market can handle a modest hiking cycle, citing 2016-2017 as a period when multiples stopped falling and stocks held up. If inflation eases, especially if oil comes down, he thinks the market could refocus on earnings and end the year higher. But if inflation stays sticky and the Fed has to move more aggressively, he warns that lower multiples could start to pressure earnings estimates as well.
Slimmon is also cautious about trying to predict the stock market based on Middle East geopolitics. Instead, he emphasizes that higher rates are already pushing investors toward larger, higher-quality companies with cash flow and less reliance on debt. He sees that shift as healthy and says the market is clearly rewarding balance-sheet strength over leverage.
Key takeaways
- Slimmon says higher interest rates are causing P/E multiple compression, and that is the main market issue, not earnings.
- He thinks Wall Street is pricing in about three Fed hikes, but the market outcome depends on how fast rates actually rise.
- Slimmon says if inflation cools and oil falls, the market could return to focusing on earnings and finish the year higher.
- He argues the market is favoring larger, higher-quality companies with cash flow and less dependence on debt markets.
- If the Fed hikes more aggressively than expected, he warns that multiples could fall toward 15 and begin to hurt earnings estimates.
Notable quotes
“THE MULTIPLE ON THE MARKET IS COMING DOWN BECAUSE INTEREST RATES ARE HIGHER AND THE FED HAS STARTED TO RAISE RATES”
“HIGHER RATES IS CAUSING COMPRESSION IN P E MULTIPLES”
“THE MARKET IS CLEARLY SNIFFING OUT THAT YOU DON'T WANT TOO MUCH LEVERAGE”
How the episode opens
Futures. A little less beautiful right now. The dow off about 290 points.
The s&p 500 off about 13 points. The nasdaq up about 15 points. Joining us right now is andrew solomon.
He's a senior portfolio manager at Morgan Stanley investment management. Been a heck of a week. It's been a heck of a week andrew.
So here we are walking into what looks like a down day. Becky gave some context for what the weeks looked like in terms of just being powered early by the earnings, and maybe a little less so now what's happening?
Well, I mean, it's classic. It's classic early right before the midterms market focuses on the macro. We've had good earnings but that's not driving the market.
You know I don't think this is out of the norm. The thing is that what I think the focus is on the macro andrew. But what really is going on here is the multiple on the market is coming down because interest rates are higher and the fed has started to raise rates.
And so that's that's the key determinant of whether, you know this is going to continue and the multiple dropped further or you know we can resume where we were prior to the fed raising rates. I think that's, you know, we're very focused on the midterms and the outcomes in the middle east. But that's really what's happening here is higher rates is causing compression in p e multiples.
Okay. So if you're right though, do they stay compressed or do they expand. And what drives it. — Yeah. So andrew, what's interesting here is the fed has started to raise rates. And right now wall street thinks they're going to raise rates three times. If you go back and look in history of when the fed begins to raise rates, wall street almost always starts with the assumption that they'll raise rates 2 to 4 times.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- pe multiple compression
- higher interest rates
- fed interest rate outlook
- market trends
- economy outlook
Companies and tickers mentioned
- MS
- Morgan Stanley
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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