Stocks Still Aren’t Close to Cheap
Any way you slice it, the stock market looks expensive
By Justin Lahart, The Wall Street Journal, April 25, 2023
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The S&P 500 index now trades at about 18.3 times analysts’ expected earnings over the next year, according to FactSet. That isn’t nearly as high as the forward price-earnings multiple of 21.6 it held at the start of last year, but in the five years ended in 2019 it averaged 16.9. It trades at about 2.25 times expected sales, down from the 2.85 it carried at the start of last year, but in the five prepandemic years it averaged 1.91. To get down to that level the index would need to fall 15%.
Forward multiples suffer in that they are based on analysts’ expectations, and analysts tend toward optimism—especially when the economy is facing challenges like it is now. Never mind that people are worried about a recession. In the consensus view of analysts, S&P 500 earnings will turn positive versus a year earlier in the third quarter, and will be up 8.5% from a year earlier in the fourth quarter…[end quote]
GIGO. If “optimistic” analysts predict positive earnings just before a recession…well, that doesn’t seem like data to bet real money on.
The article cites the historically high Schiller Price to earnings ratio, based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted P/E Ratio (CAPE Ratio). This is currently 29, higher than any other time going back to 1875 and almost twice as high as the median of 16.
The article also cites The Buffett Indicator: Market Cap to GDP (ratio of the total value of all stocks to GDP). This is currently 156% compared with a mean of about 90% over the past 50 years.
The monetary stimulus from the Federal Reserve has pumped up the value of all assets. It’s like a bathtub filling with water that floats all the toy sailboats.
This is unprecedented in U.S. history. It’s not clear whether the current bloated asset prices can be compared with historical prices since they have been artificially pumped up as part of an “everything bubble.”
The Fed has expressed the desire to very gradually shed its giant book of Treasuries and mortgage bonds. If they ever really pulled the plug in the bathtub drain the markets would plunge. But I don’t think they will do that. We saw how quickly they bought more Treasuries when Silicon Valley Bank collapsed.
All previous bubbles have popped. Entertaining and illuminating books have been written about this.
In general, it’s a bad idea to buy stocks just before a recession. Especially when they are still in a historic bubble price-wise.
Wendy