S&P 500 Still Reasonably Valued
Brian Gilmartin | Oct 15, 2018 12:16AM ET
What the title of today’s post doesn’t tell you is that valuation is a slippery slope. Some of the seemingly cheapest stocks in the S&P 500 are not really attractive values, but more “value-traps” which like the Sirens of Greek mythology fame, lure investors in, only to see themselves dashed on the rocks. Ford (NYSE:F), General Motors (NYSE:GM) and Bed Bath (NASDAQ:BBBY) all come to mind. All very cheap on a valuation basis, all adept at destroying investor capital. (Long GM, a little Ford.)
That being said, the market’s valuation, i.e the S&P 500, is always used by both bulls and bears to make their respective cases.
Here is the updated spreadsheet on S&P 500 valuation using JP Morgan’s Guide to the Market template, which is one of the few S&P 500 valuation tables (that I know of) that incorporates cash-flow valuation for the S&P 500:
(Source: JP Morgan’s Guide to the Market – apologies for the small print)
What’s fascinating to me is that since January 1 ’17, using the SPDR S&P 500 ETF (NYSE:SPY) performance data on Morningstar Premium, the S&P 500 is up roughly 26.5%, in terms of total return over that 22 months, while the valuation metrics like PE, Div yield, P/B, P/CF (price to cash-flow) remain unchanged.
Only Shiller’s P/E has managed to elevate a little.
The S&P 500’s P.E. is actually a little lower than early ’17 due to the corporate income tax rate reduction.
Summary / conclusion: CNBC’s Friday night show featured Carter Worth (again) who is a pretty good technician, and he pointed out that the brief move over January ’18’s high was a “bull trap.” The technicians – for good reason – seem to think the risk in the S&P 500 today is a trade down to the February ’18 lows of 2,532.69. That was pretty close to the 200-day moving average in February ’18. On Friday, October 12th, 2018 the S&P 500 closed just one point above the current 200-day moving average 2,767.13.
Fast Money was only brought up because a number of technicians read over the weekend noted the 2018 lows and the failure at the January ’18 highs, hence Carter gets the shout-out.
Personally, I don’t think the S&P 500’s valuation at current levels are all that unreasonable, or even extended, but sharply rising interest rates and trade issues can “compress” valuation, and ultimately slow growth.
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Note the market P.E. and the price-to-cash-flow relative to this year’s mid 20% S&P 500 EPS growth rate of mid 20%, or even next year’s expected 10% S&P 500 EPS growth rate.
The S&P 500’s valuation still seems pretty reasonable.
(Here are some other S&P 500 valuation posts that were written in the last few years: here, here .)
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