Right now, the American stock market is far from cheap.
It is bold to say, expensive.
This should come as no surprise considering that the S&P 500 has risen 12 over the past 13 years (including this year), including a 100% gain from Crown minimum shocks in just 15 months.
According to the Shiller CAPE ratio, the U.S. stock market is now as expensive as at any time in its history, except for the dot-com bubble:
The Shiller CAPE reached 44x at the end of 1999.
Assuming there are no changes in earnings (a great fact, but join me), we are at less than 16% of these levels.
I can’t predict the future, but it’s not a fact to say that we are likely to see the highest valuations in the history of the stock market at some point in this cycle.
While it would be foolish to call the stock market anything that is not expensive right now, a certain context is required here.
The JP Morgan Market Guide has excellent graphics that do just that. Here’s a good one that shows several different valuation measures compared to 25-year averages:
Valuations are certainly in the upper band, even when measured in relation to the last 25 years, which has been a time full of above-average historical valuations.
There’s one that may surprise you: this year, in fact, we’ve seen multiples at the S&P 500 contract:
Profit growth has been so strong this year that the S&P 500’s multiple price-gain has fallen. Although stocks have risen close to 20%, profit growth has outpaced the market.
There is a good reason for this. The stock market is rising because the fundamentals are improving. Revenues have returned to the return of the recession (for Sam Ro):
This graphic is amazing.
Okay, I think so, but I’m not sure how many people would have believed it in the spring of 2020. Indeed, the stock market managed to take off like a rocket coming out of the crisis. He basically predicted this massive rebound in profits.
I would also be reckless if I didn’t mention the elephants in the room when it comes to the bag.
Apple, Microsoft, Amazon, Google and Facebook are now collectively worth more than $ 9 trillion (up from $ 1.1 trillion when Facebook went public in 2012).
In many ways, these companies they are the bag right now. Or at the very least, they will have their opinion on the direction and fundamentals of the market because they have such a small market share.
JP Morgan also exploded valuations and profits on S&P’s top ten stocks (which also includes Berkshire Hathaway, Tesla, Nvidia, JP Morgan and Johnson & Johnson) and everything else:
The top ten stocks are now approaching 30% of the market. It sounds scary until you see that they contributed 34% of last year’s revenue. These companies are huge for a reason.
They are also expensive for a reason. It can be seen that once the first ten shares are removed, the valuation of the other 490 shares approximately does not look so bad.
How about one more chart to get that point home?
This shows that the average S&P 500 P / E ratio is now even higher than that of the tech bubble. But look at the scatter around the median. There is a wide range between the upper and lower quintile of stocks.
The problem for investors is that many of these stocks that have low valuations are cheap for a reason. And most stocks that have high valuations are expensive for a reason. Choose your poison.
I’m not trying to say that stocks are cheap. I don’t even try to say they’re not expensive.
With interest rates so low and the market at record highs, I would almost worry more if the stock market it was not car.
But there are good reasons for the overvaluation in the U.S. stock market right now.
This is not to say that yields should be kept high, but it also does not guarantee that a second arrival of the dot-com error is inevitable.
Context is important.
To read more:
Could we see record valuations in the stock market this cycle?
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