Multiple Compression

Multiple compression means investors are willing to pay a lower valuation multiple for a company or market. In simple terms, multiple compression happens when stocks become cheaper relative to earnings, revenue, or cash flow. Multiple compression is important because stock prices can fall even if a company is still profitable. It often happens when interest rates rise, investors become more cautious, or growth expectations weaken. For example, if a stock moves from 25 times earnings to 18 times earnings, that is multiple compression. Multiple compression is not always caused by bad company performance. It can also happen because the broader market becomes less willing to pay high prices.