Posts filed under “Valuation”
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.
click for larger graphic Source: Merrill Lynch Research We interrupt the upcoming economic apocalypse and market collapse for this surprising message. Earnings are being revised higher, as are Revenues as well. Merrill Lynch, who tracks these sorts of things, notes that the latest revised expectations for Q2 are “1.3% higher than they were…Read More
Readying for Financial Bubbles to Burst By Andy Xie Caixin 07.29.2013 Small troubles regarding trust products and the property market will be worth enduring if major economic gains can be made Some financial accidents, e.g., trust products defaulting, may occur in the coming months. Their impact on the real economy will be limited….Read More
S&P500 Earnings, Quarterly versus Price (Q1 2009- Present) Click to enlarge Source: Bloomberg Data S&P500 Earnings, Trailing Year versus Price (1990 – Present) Source: Dan Greenhaus, BTIG Following last week’s discussion on narratives, I want to direct your attention to the charts above. One shows the quarterly recovery in earnings and prices since…Read More
Click to enlarge Source: Bloomberg Interesting chart form Dave Wilson showing how elusive the U.S. housing market’s rebound has been for the Homebuilders. Existing single-family homes sold at about the same pace in May as they did in January 2000, according to data compiled by the National Association of Realtors. New home sales…Read More
Click to enlarge I have to admit: I have never seen this ratio before. Standard & Poor’s 500 Index to profits at all U.S. companies. Its a price to earnings ratio of the main US stock market against ALL US earnings. According to this little used, odd ratio, Stocks are much cheaper after…Read More
Several comments in yesterday morning’s post sent me back to GMO’s archive to pull some of Ben Inker’s work. You should read yesterday morn’s commentary (here), than come back and read Inker. In particular, his piece Explaining Equity Returns. The five takeaways are as follows: 1) GDP growth and stock market returns do not have…Read More
“If you’re bullish and wrong, you usually have plenty of company. But if you’re bearish and wrong, it’s almost unforgivable.” -Bob Kargenian, TABR Capital Management, Barron’s DECEMBER 15, 2012 The above quote from Barron’s has been on my mind for a while. I thought of it again as the markets have made…Read More