Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
As the market continues its gravy train upward in 2013, despite morbid earnings growth, valuations have obviously increased substantially. Either the market is going up due to earnings or P/E/ multiple expansion (and usually some combination of both) – but this year has been mostly about the latter. Of course as we saw in 1999, the Fed can drive markets to “unbelievable” heights and push the P/E multiple to areas not thought possible. Which is fine and dandy as underlying fundamentals and valuations can disassociate for a while…. until something like 2000-2002 hits. Those who believe this market is being driven by the Fed also believe a “2000-2002” period is ahead. But as we saw in 1999, while you wait for that (or bet against the market) you can go broke – even if you are eventually proven correct. So a lot of what is being posted below is intellectual gymnastics – some say the market is getting pricey, some say it is still in decent shape… but everyone can agree things are not as “cheap” as they once were.
First via the WSJ:
- ….stocks in the S&P 500 are at their highest price/earnings ratio in nearly four years, and above their average multiple of the past 10 years. The S&P 500 is trading at 14.5 times its expected earnings for the next 12 months, according to FactSet. That is above the index’s average P/E of 14.2 for the past 10 years, and the highest monthly reading since September 2009. The S&P 500’s forward P/E hasn’t crossed above 15 since October 2007.
- ….(some) investors say stock valuations aren’t anywhere near the extremes seen in the past. Also, stocks often have traded at relatively high P/E readings for extended periods without suffering big declines.
- The S&P 500 remains below its average valuation of 16.6 since 1988, according to S&P Dow Jones Indices. But that includes the dot-com bubble of 1999 and 2000, when investors paid as much as 27.6 times every dollar of the S&P 500’s expected earnings. Investors haven’t paid more than 20 times the coming year’s earnings for the S&P 500 since 2002, according to FactSet.
- ….second-quarter corporate profits are on track to rise just 2.1% from the previous year, according to FactSet. That is down from a 3.4% increase in the first quarter.
Meanwhile Bank of America/ML has a different view –
- Admittedly, the majority of 2013’s gains have come from multiple expansion rather than earnings growth, but the market is far from overvalued. This suggests that the market has merely played catch up with fundamentals – recall that earnings made new highs in 2010. Valuation remains a driver for our bullish view on stocks.”
- The majority (of 15 indicators) indicate that the market is still trading below or in-line with historical norms, suggesting that the rally has chiefly been driven by a recovery in multiples from very depressed levels,” says Subramanian.
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