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With a recession already unfolding and Jerome Powell issuing warnings about the risks of stagflation, now is a crucial time to start talking about P/E compression—a concept that many investors overlook until it’s too late. https://thehill.com/business/5252260-fed-chair-jerome-powell-economic-warning/ So, what is P/E compression? P/E compression occurs when a company’s price-to-earnings (P/E) ratio declines, even if its actual earnings remain stable or increase. This typically reflects a broader loss of investor confidence or a shift in how the market reprices risk and growth expectations. In essence, it means that investors are no longer willing to pay a premium for a company’s earnings like they once did. Even solid earnings aren’t enough to push stock prices higher when sentiment turns cautious or skeptical. We’re seeing this unfold in real time. Netflix, for example, reported strong earnings last week. Under normal market conditions, such results would have triggered a substantial after-hours rally. But this time, the stock saw only a modest move—evidence that investors are becoming more conservative, even with good news. Similarly, UnitedHealth Group (UNH) saw its stock plunge more than 22%, despite only a slight increase in its Medical Cost Ratio (MCR)—a key indicator of healthcare profitability. That kind of reaction signals P/E compression in action: a repricing of risk and value, not just earnings performance. P/E compression typically happens when there is a recession or economic slowdown, shifts in investor sentiment, or as we’re now facing: a combination of stagflation and macro uncertainty While the headlines and retail investor chatter might make it feel like we’re in another short-lived downturn—similar to the COVID-19 crash—the underlying economic indicators suggest something more structurally serious, perhaps even closer to 2008 or the Great Depression in nature. The consumer is weakening, inflation is sticky, and earnings growth is slowing. Yet many valuations are still priced for optimism–looking at you Tesla! Moving forward, I believe we are heading toward a system-wide reset of P/E ratios across nearly every sector. Market makers and institutional investors are starting to re-evaluate what companies are truly worth, not based on hype or momentum, but on fundamentals. The earnings season over the past two weeks has made this trend crystal clear: companies that beat expectations are seeing muted gains, while those that miss are getting severely punished. The days of sky-high P/E multiples without real growth or profitability to justify them are coming to an end. This isn’t fearmongering—it’s recognizing a market that is slowly waking up to reality. Additionally, for those who are looking at the market, I want you to compare the daily volumes vs the 10 days average and the 90 days average. Seeing anything unique? Market volume has been dropping significantly, and in my view, we’re now firmly in a Wyckoff distribution phase across the broader market. What might seem like bullish outliers—sharp moves in meme stocks, sector-wide reactions, or earnings-driven spikes—are more likely strategic moves by market makers (MMs) to unload their positions. They’re taking advantage of temporary retail enthusiasm, amplified by headlines and social media chatter. Retail traders, often unaware of the bigger picture, are stepping in and buying the dips, unknowingly becoming bag holders. Meanwhile, news coverage and social sentiment are validating these price moves, creating a false sense of optimism. It’s a classic setup: smart money sells into strength while retail absorbs the risk. What’s most concerning is the continued push on social media encouraging people to “buy the dip.” Honestly, that kind of advice in this current environment is reckless. Why take unnecessary risk during a period of stagflation, where both inflation and unemployment pressures are high, and economic growth is slowing? There’s very limited upside when valuations are already stretched and earnings growth is uncertain. On the other hand, the downside risk is enormous—especially if you’re trying to call a bottom in a structurally weak market. This is not the time to play hero. It’s a time for caution, discipline, and recognizing the signs of institutional exit strategies in plain sight. Anyway, this is just my thought. I want to get this idea out so we can all witness the PE compression happening in real time for the earning season. submitted by /u/Rainyfriedtofu to r/WallStreetbetsELITE |