A situation in which a
publicly-traded company's share price does not rise, or may fall, even on strong
earnings. That is, multiple compression occurs when the
price-earnings multiple falls. Multiple compression is usually the result of
investors' skepticism on
growth prospects. Generally, investors
buy stocks with high price-earnings ratios if they are confident in high, future growth; when multiple compression occurs, it may indicate that investors believe that growth rates are leveling off, and that the company is unlikely to grow much more. To an extent, this is a positive sign, as it shows confidence that the company has become well-established, but, on the other hand, it may be a sign that investors believe the company's stock is
overvalued.