Click to enlarge
Merrill Lynch’s quant team looked at 15 metrics* that measure equity valuation (above).
Stocks are not overvalued; indeed, by most metrics, they are fairly valued.
Key bullet points:
• S&P 500 has been playing catch up to other indices;
• 14 of 15 measures say S&P 500 is fair to undervalued;
• Only the Shiller P/E suggests stocks are expensive;
• Four rotations underway are underway (that imply where best values might be found);
One worthwhile thing to add: I have been warning certain emailers/pundits/bears who seem to look at the Shiller P/E — and ONLY the Shiller P/E — that they are engaging in some confirmation bias in their metric selection process.
I cannot say that stocks are cheap here, but they also are not wildly overvalued. What happens going forward will depend on earnings — will they rise as the economy achieves escape velocity? Will they fall 30% as the economy tips into a recession.
The answer to these questions are here.
What is the Cyclically Adjusted S&P500 P/E Ratio ? (February 26th, 2010)
Why Using P/E Ratios Can Be Misleading (March 21st, 2012)
Meb Faber: Buy Cheap Cyclically Adjusted P/E (CAPE) (September 4th, 2012)
Stocks: Cheap or Expensive?
Savita Subramanian, Dan Suzuki, Alex Makedon, & Jill Carey
Bank of America Merrill Lynch, August 9, 2013
* There are additional some asterisks and caveats:
The Trailing P/E is based on GAAP EPS from 1960-1977, there have been many changes to the rules of GAAP accounting over the years.
Normalized EPS versus risk-free rate of return of treasuries is (obviously) skewed by ZIRP/QE.
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.