Are falling blue chips signaling tougher times ahead?
For years, investors viewed blue chips listed on the Philippine Stock Exchange (PSE) as permanent compounders because of their ability to sustain long-term growth and profitability. Strong earnings and dominant market positions allowed many of these companies to trade at premium valuations for years.
But today, that confidence appears to be fading.
As the PSE Index (PSEI) struggles to stay above the 6,000 level, many of its most established corporations are no longer trading at the premium valuations investors once considered normal. Some even trade below book value despite remaining dominant businesses in their industries.
Ayala Corp. now trades at barely 0.54 times book value after falling more than 25 percent from its 2024 levels. Ayala Land trades below book value after declining more than 41 percent from 2024 levels and nearly 67 percent from its 2018 highs.
GT Capital Holdings and San Miguel Corp. now trade near half of book value. Even some of the country’s largest banks, including BDO Unibank and Bank of the Philippine Islands, now trade around book value despite historically commanding higher valuation multiples during stronger economic cycles.
At first glance, many investors would view these declines as part of a normal mean reversion cycle. The theory argues that markets periodically become excessively pessimistic, which causes fundamentally strong companies to trade far below intrinsic value. Over time, sentiment stabilizes and valuations move closer to historical norms.
History shows that during periods of extreme pessimism, investors who accumulated high-quality companies at depressed valuations often generated extraordinary long-term returns once conditions normalized. The idea behind mean reversion is that market fear is often temporary, while strong businesses eventually recover over time.
But another body of financial research suggests a far more uncomfortable possibility.
What if falling stock prices are not merely emotional overreaction? What if markets are already beginning to anticipate weaker business performance years before accounting earnings fully deteriorate?
This idea forms part of a major stream of financial literature that argues stock prices are fundamentally forward-looking. One of the earliest and most influential studies came from the landmark 1968 research of Ray Ball and Philip Brown entitled “An Empirical Evaluation of Accounting Income Numbers.”
Their study showed that stock prices often begin adjusting before earnings deterioration becomes fully visible in financial statements.
Markets, in other words, do not merely react to current accounting data. They continuously discount expectations about future profitability.
That framework later became even more important in financial distress research. Studies by John Y. Campbell, Jens Hilscher and Jan Szilagyi in the landmark paper “In Search of Distress Risk” found that companies with prolonged stock price weakness and distress characteristics often continued to underperform years later. Their findings suggested that markets may recognize signs of future operational weakness before those problems become fully visible in reported earnings.
An even more controversial interpretation comes from socionomic theory developed by Robert Prechter. Unlike traditional finance, which assumes stock prices react to economic fundamentals, socionomics argues that markets themselves may lead future economic conditions.
Under this framework, falling stock prices may not simply reflect poor earnings. Instead, they may become early signs of declining social mood that eventually influence business conditions and investor behavior.
For example, prolonged market weakness can reduce confidence and consumer sentiment, which may eventually contribute to softer corporate profitability in the years ahead.
This may be particularly relevant today because many blue chips have only started to report slower earnings growth, yet valuations have already fallen sharply. Could it be that the market is already discounting slower growth and lower returns on capital?
This raises a critical issue. The market may not be reacting merely to current earnings weakness. Instead, it may already be discounting the possibility that returns and growth rates could remain subdued for years.
Still, this does not necessarily mean the market is correct. Mean reversion remains one of the most powerful forces in investing, and some of today’s deeply discounted blue chips may eventually recover strongly if profitability proves more resilient than investors currently fear.
At the same time, financial research suggests investors should not automatically assume that every low valuation represents a bargain. In some cases, prolonged market declines become early signals that investors expect slower growth ahead.
Investors must now consider if the market is already anticipating weaker conditions before they fully appear in corporate earnings.
If the sharp declines in many blue chips mainly reflect excessive pessimism, then valuations and the broader market could eventually recover through mean reversion.
But if the message embedded in today’s stock prices proves correct, then the market may already be pricing weaker earnings growth and profitability.
The bigger question now is whether investors should expect more disappointing earnings reports over the next several quarters, or even the next several years. If so, today’s depressed valuations may not yet represent the end of the repricing process.
Instead, weakness in many blue-chip stocks may already signal adjustment to a slower business environment. And if that scenario materializes, the PSEI may still face further downside before a more durable recovery emerges.
Henry Ong is a registered financial planner of RFP Philippines. To learn more about investment planning, attend 116th batch of RFP Program this June. To register, email at [email protected]
