Private company valuations during market volatility
Listed stock data are one of the tools we use as a benchmark in private company valuations. However, we have seen turbulence in global equity markets recently, which can make reaching a reliable valuation of a private company more problematic.
Even though markets had been falling for several weeks in anticipation of tariffs, US President Donald Trump’s announcement on 2 April 2025 led to a further decline. Markets since recovered following various suspensions and reductions in the tariffs, particularly following the US-China announcement on 12 May 2025.
There are many factors influencing share prices. Consistent across all major markets is the fear that tariffs, real or threatened, would cause higher import costs, disrupted supply chains, reduced demand and retaliatory tariffs; directly impacting earnings and margins.
Forward earnings and forward multiples
Forward earnings are a ‘consensus estimation’ prepared by equity analysts usually on the back of company management forecasts. Dividing a company’s share price by its forward earnings per share gives investors the multiple of forward earnings inherent in a company’s share price.
Whilst forward earnings are predicted but not fully reliable, forward multiples can provide a valuable insight into current market sentiment. Investors can analyse forward multiples between similar companies to help compare investments.
Previous significant events may provide an indication of the possible outcomes of the current turmoil. Alongside the tariffs, we have considered the relationship between price, forward earnings and forward multiples of the S&P 500 at the start of the Coronavirus pandemic and the situation in Ukraine.
Coronavirus
The graph tracks the percentage movement of the S&P benchmark price, forward earnings and forward multiple from January 2020 to December 2020.
Global stock markets fell substantially in February 2020 after the WHO announced the new Coronavirus disease. Between 20 February 2020 and 19 March 2020, by which time the WHO had declared a global pandemic, the S&P 500 benchmark price dropped by around 29% in anticipation of supply chain disruption and business closures.
Forward earnings were reduced accordingly, but the reporting of these reductions occurred between 12 March 2020 and 28 May 2020. The time lag initially caused the forward multiple to fall alongside the S&P 500 benchmark price, before rebounding substantially and ending around 27% higher by the end of May 2020 compared with the start of the year. This implies that the market may have overreacted.
Ukraine
The graph tracks the percentage movement of the S&P benchmark price, forward earnings and forward multiple from January 2022 to December 2022.The S&P 500 suffered again in 2022 following the start of the situation in Ukraine, reflecting concerns about the impact of rising energy prices, inflation and trade sanctions on earnings and margins. Contrary to these expectations, forward earnings remained relatively stable throughout the year and, as a result, multiples and prices remained closely aligned.
Trump’s tariffs
Regarding the current market turbulence, the graph tracks the percentage movement of the S&P benchmark price, forward earnings and forward multiple from mid-June 2024 to mid-June 2025.
As with the pandemic, earnings were expected to drop after the 2 April announcement, albeit having fallen by only around 8% as at the time of writing. The S&P benchmark price and forward multiple steadily diverged between the US election result and 2 April. Since forward earnings were downgraded in mid-April, the S&P benchmark price and forward multiple have converged.
Whilst there is ongoing uncertainty, the S&P benchmark price has since rallied, especially following the US-China announcement on 12 May 2025. Whether there will be any further downgrading in forward earnings or earnings will be re-stated to previous levels following the various tariff suspensions and reductions remains to be seen.
Despite the US-China announcement, tariffs remain in place for many of the US’s trading partners, although deductions and exemptions between the US and various countries are being agreed. Businesses are also considering strategies to reduce the impact of tariffs, such as moving operations or targeting different markets. Consequently, quantifying the impact of these tariffs is problematic. We have also seen private companies temporarily (they believe) halt plans in recent weeks because of the tariffs.
The market reacted negatively but has since bounced back following various tariff climb-downs. Whether this recovery will be sustained is unknown as we get almost daily updates. The 2022 experience, when the S&P benchmark price hadn’t recovered by the end of year even though forward earnings weren’t downgraded, illustrates that the market is often driven by sentiment over numbers.
Impact on valuations of private companies
Applying multiples to the forward earnings of a private company to estimate a value is a simple mathematical process. However, multiples can fluctuate in a short period and the results on specific dates within that period may substantially differ. The recent history of the S&P 500 is an example of this.
Whilst a valuer would not typically take the forward multiple exhibited by a market index such as the S&P 500, their price movements are representative of movements in the wider market. Taking the S&P 500 as an example, a private company valuer would have arrived at a value 14% lower on 10 April 2025 than on 20 February 2025.
Although listed and private companies are generally subject to similar market forces, private company shares have less liquidity and do not react so quickly to immediate and often volatile sentiment. Private company valuers might consider a nuanced approach, giving more weight to the intrinsic value of a business, than fluctuating multiples that may produce arbitrary results.
