I hate to be the one to bring this up, especially since I am
such a raging bull.
But apparently, "historical P/E multiple" is a very abused
description. It's all about the data you use says Goldman Sachs
equity strategist David Kostin.
Kostin issued a report over the weekend to explain why the market
is so pricey, chock full of graphs and tables that help visualize
it. But his words below do a great job of getting the point
"The current valuation of the S&P 500 is lofty by almost any
measure, both for the aggregate market as well as the median stock:
(1) The P/E ratio; (2) the current P/E expansion cycle; (3)
EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book
as well as the ROE and P/B relationship; and compared with the
levels of (6) inflation; (7) nominal 10-year Treasury yields; and
(8) real interest rates. Furthermore, the cyclically-adjusted P/E
ratio suggests the S&P 500 is currently 30% overvalued in terms
of (9) Operating EPS and (10) about 45% overvalued using As
Reflecting on our recent client visits and conversations, the
biggest surprise is how many investors expect the forward P/E
multiple to expand to 17x or 18x. For some reason, many market
participants believe the P/E multiple has a long-term average of
15x and therefore expansion to 17-18x seems reasonable. But the
common perception is wrong.
The forward P/E ratio for the S&P 500 during the past
5-year, 10-year, and 35- year periods has averaged 13.2x, 14.1x,
and 13.0x, respectively. At 15.9x, the current aggregate forward
P/E multiple is high by historical standards.
Most investors are surprised to learn that since 1976 the S&P
500 P/E multiple has only exceeded 17x during the 1997-2000 Tech
Bubble and a brief four-month period in 2003-04. Other than those
two episodes, the US stock market has never traded at a P/E of 17x
I bolded the section that stood out most to me. "But the common
perception is wrong," says Kostin. Maybe I need to reevaluate my
ideas that this market can easily push to a 17-18 multiple. But I
still think it will because enough conditions are right for, dare I
say it, this time to be (slightly) different and poke its head
So my question is this: How will the momentum multiple expansion
continue to win the day in the short-run (3-6 months) and override
long-run valuation concerns?
SPDR-DJ IND AVG (DIA): ETF Research Reports
ISHARS-R 2000 (IWM): ETF Research Reports
NASDAQ-100 SHRS (QQQ): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-20+YTB (TLT): ETF Research Reports
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