Despite the recent modest profit-taking in the S&P 500, the market – just shy of its all time high 2,400 level – remains in nosebleed valuation territory.
As Bank of America calculates, in March the S&P 500 forward P/E was little-changed amid a flat month for stocks, and at 17.5x continues to trade at its highest levels since 2002 (on a trailing basis P/E is at 19.6 and 29.0 based on the Shiller PE). This is almost one turn higher since we last performed a similar valuation exercise back in December.
Hardly a bargain, stocks remain stretched vs. history on the majority of metrics Bank of America tracks (Table 2) and as Savita Subramanian points out, the only way stocks still look cheap is relative to bonds. While BofA is quick to warn that today’s elevated valuations suggest longer-term caution on stocks, it reminds clients that “valuations typically matter little in the final stage of a bull market during which sentiment and positioning are the key drivers of returns.” This is also known as the so-called “just buy everything” cop out.
Stripping away BofA’s subjective commentary, to allow readers to decide for themselves whether stocks are massively overvalued and overbought, or perhaps cheap, here is a breakdown of the S&P 500 across a wide variety of valuation measures — 20 in total — to gauge whether US stocks look cheap vs. history. What the analysis shows is that of 20 metrics, the S&P is overvalued based on 18 by as much as 85% (on a historical market cap to GDP basis) and up to 105% if looking at the S&P in WTI terms, and is cheap only according Price to Free Cash Flow (25.1x vs 28.4x) which however is a function of ultra low interest rates, and also based on a ratio of the S&P-to-Russell 2000 fwd PE multiples. A third metric which last December suggested stocks were “cheap“, namely trailing normalized PE (19.6x vs 19.0x average) flipped to “rich” in the past 5 months…