Multiple Compression
The effect that arises when a stock trades at a certain multiple and, while earnings may be strong, the stock price doesn't move up (or even goes down). The result is that the given multiple (P/E ratio) is reduced even though nothing is fundamentally wrong with the company. Compression of a company's multiple can be interpreted as the valuation being called into question.
Investopedia Commentary
Remember, the multiple is based off of many factors, but most importantly the future expectations of a company. If a company trades at say, a P/E multiple of 50, this means investors are paying $50 for each $1 of earnings. Generally, an investor would only pay such a high multiple on the expectation that the company will grow significantly faster than its competitors or the stock market in general. When the company's growth rates start to slow, investors might start to doubt its growth prospects, and thus not pay an expensive a premium as they once did. In our case, the company might experience multiple compression with the P/E shrinking to 25, even though earnings haven't changed. With the same earnings of $1, this would mean that the stock price fell in half (25/50 = 1/2). This demonstrates how the stock price could go down when earnings stay the same.
Related Links
Understanding the P/E Ratio
Introduction to Fundamental Analysis
Ratio Analysis Tutorial
How The PEG Ratio Can Help Investors
See also: Earnings Multiplier, Forward Earnings, Multiple, Price-To-Earnings Ratio, Valuation
multiple compression