Stocks are richly valued today, but they’ve been more expensive at times in the past. High valuations imply unimpressive long-term returns, but they have no relationship at all to how the market does in a given year…
Even a pricey stock market can be made to look reasonable when compared to certain other assets. And there’s a big difference between a market that’s pricing in a lot of good news and a genuine bubble.
In other words, for a concept that seems all about hard numbers and observable relationships, there is plenty of nuance and subjectivity in assessing equity valuations.
Right now, it’s hard to deny that on the whole, stocks are rich relative to past earnings and forecast earnings. The trailing price/earnings ratio of the median U.S. stock, tracked by Ned Davis Research, has never been higher.
Based on 2021 forecasts, fewer than a third of the companies in the S&P 500 trade for under a 15 P/E, the rough long-term average trailing multiple. It’s a list packed with banks, insurers, “post-growth” Old Tech and slow-moving drug distributors.
This battery of valuation tests from Goldman Sachs shows the market to be at or near the most-expensive levels in recent history on most measures:
Strategists looking to make the upbeat case for paying up for stocks zero in on those two “yield gap” indicators. These compare the S&P’s earnings yield – forecast profits divided by stock price – to Treasury and investment-grade bond yields.
Billionaire Fears: “America will end as we know it.”
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