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Stocks: Cheap or Expensive?

Posted By Barry Ritholtz On August 9, 2013 @ 11:30 am In Investing,Valuation | Comments Disabled

Click to enlarge

S&P 500 Valuation Metrics [1]
Source: BofA Merrill Lynch US Equity & US Quant Strategy



Merrill Lynch’s quant team looked at 15 metrics* that measure equity valuation (above).

Their conclusion?

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 [2].




What is the Cyclically Adjusted S&P500 P/E Ratio ? [3] (February 26th, 2010)

Why Using P/E Ratios Can Be Misleading [4] (March 21st, 2012)

Meb Faber: Buy Cheap Cyclically Adjusted P/E (CAPE) [5] (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.

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2013/08/stocks-cheap-or-expensive/

URLs in this post:

[1] Image: http://www.ritholtz.com/blog/wp-content/uploads/2013/08/SP-500-Valuation-Metrics.png

[2] are here: http://www.ritholtz.com/blog/2013/08/on-the-value-of-not-knowing/

[3] What is the Cyclically Adjusted S&P500 P/E Ratio ?: http://www.ritholtz.com/blog/2010/02/what-is-the-cyclically-adjusted-pe-ratio/

[4] Why Using P/E Ratios Can Be Misleading: http://www.ritholtz.com/blog/2012/03/why-using-pe-ratios-can-be-misleading/

[5] Meb Faber: Buy Cheap Cyclically Adjusted P/E (CAPE): http://www.ritholtz.com/blog/2012/09/chart-of-the-day-ten-years-of-earnings-may-put-investors-ahead/

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