http://finance.yahoo.com/news/morgan-stanley-ready-period-low-122014977.html
I bumped into an additional bit of data that really illustrates just how inflated stocks prices are – while we aren’t at dotcom mean valuations which hit 29X, we are way beyond dotcom when looking at the median. At 23X trailing, S&P500 is higher than anything since 1950 (chart on pg2 in link below).
“In the late 1990s, surging technology stock prices caused the overall S&P 500 P/E multiple to reach record highs even though the median stock’s P/E multiple never became excessive. Conversely, today, although the S&P 500 P/E multiple remains far below record highs, median valuations are at a pinnacle.”
Update to this still very relevant thread…
S&P500 Q1 earnings (with 98% of companies now reported):
As Reported Earning (ttm) = $86.44
Price = 2065
P/E = 23.9X
Earnings decline (ttm) = -12.9%
And remember, that 24X P/E is AFTER all the buyback manipulation. Been shorting every time it goes over 2100, and will keep doing that.
Excel data direct from S&P, all other number from “FactSet” Bloomberg etc are intentionally manipulated bullshit: http://kr.spindices.com/documents/additional-material/sp-500-eps-est.xlsx
Some things to think about regarding the S&P
Business Investment has lacked substantially the last few years >> consumers haven’t had the same support from corporations as they have had in previous business cycles>> The U.S. stock market has boomed, but the U.S. economy hasn’t experienced a boom like previous ones. Monetary conditions have been easy, but lending conditions haven’t been. Inflation has been quite low, high inflation ultimately eats at multiples. So higher multiples are not neccessarily unjustified in a low inflation environment. Combine this with low interest rates and you now have many stocks being a better alternative than low paying bonds (after the bond price increases of course). True, this means the bonds still have real returns, but if you expect any noticable pickup in inflation over the long-term you can essentially kiss that real return and that bond price goodbye.
All in all, when you look at a broad picture of the U.S. economy (in comparison to it’s past, not to other nations), you get the sense that it’s still in recovery mode. The last couple years have seem some major signs of improvement, but the U.S. isn’t there yet. What kind of profits would companies start to have in a few years time if they have worked through minimum wage hikes, interest rate hikes, the last remnants of the financial crisis, and the end of lackluster business investment?
I think that multiples may be a bit high, but if you look at the upside potential, maybe they’re not that stretched for a long-term investor. Some portions of the S&P probably are overvalued though.
Personally, I would welcome any market downturn as a great buying opportunity.
haha i like the analysis purealpha. i actually did a factcheck on this a while back as well. i didnt do the breakdown however. I also used shiller’s data. enjoy. this is better/more stuff.
http://www.econ.yale.edu/~shiller/data.htm
i agree with most of what pure alpha said. i think forward earnings are dumb as well. actual earnings are better. which is why free cash flow is a better metric. also if you want to remove the effects of buybacks. just use enterprise value instead of market cap/price, since debt is incorporated.
http://www.wsj.com/articles/s-p-500-earnings-far-worse-than-advertised-1456344483
sadly, though only a few companies in hte S&P 500 follow GAAP.
http://www.another71.com/cpa-exam-forum/topic/only-57-of-sp-companies-use-gaap
anything with manipulations is ridiculous, i dont care if its not going forward, if you made the mistake and made a loss that shit needs to be incorporated.
http://www.cnbc.com/2016/03/01/mind-the-gaap-buffett-warns-of-deceptive-earnings.html
a ceo’s job for the most part is to increase share price. but as an investor, your job is to sift through the bs they feed you.
forward earnings aren’t the key. normalized earnings are. forward earnings incorporate analysts’ normalization. pa is using unadjusted data. he is on a CFA forum but is not performing the sole job duty of a CFA which is to normalize earnings.
while earnings are certainly not cheap, irrespective of what metric you use, with negative interest rates in most developed markets, if equities acheive a long-term return of 2%, you’re laughing. same goes for housing. canadian house prices, which are deemed to be crazy overpriced by every economist on the planet, are actually cheap compared to 30 year yields worldwide, and potentially compared to equities. you heard it here first. i think canadian house prices are undervalued based on interest rates and long-term interest rate expectations. current carrying costs on the average Toronto house is about 2/3rds of the historical carrying cost, in order for Canadian housing to have the same carrying cost as in the past over the life of a 25 year mortgage, the average interest rate would have to average 4.5% on a 5 year fixed rate mortgage in years 5-25, the years after the first 5-year term. not going to happen. thus while real estate will return a much lower rate than in the past, its return is still attractive relative to other assets and its carrying cost is far lower. canadian housing, including toronto, is very likely undervalued relative to the past given the current outlook for asset returns in general. vancouver is likely just fairly priced.
One problem, the S&P companies haven’t been investing in their future, they have been doing share buybacks greater than their earnings (to manipulate P/E down to this 24X number). Obviously unsustainable.
Also, not sure how much the largest 500 US companies can really grow revenue. They are already huge. The middle class are already fully cannibalized. How much more Pepsi does the planet need? Maybe they are coming up against a revenue growth ceiling.
I would buy, but it would have to be a very large downturn. In the meantime I sell calls at 2100 and sell puts at 1800, probably repeat this for years until they work thru this stall.
Speaking of which, just about that time for more easy money!! 
Almost touching 2100, “oh yeah Brexit is over!” greed fest. This run back up has happened pretty darn fast, gonna chill till tomorrow AM and see what happens, maybe sell some 2100 calls expiring after the US election. I’d like to see a plump 2110 and short that fucker w futures.
Howard Marks figuring out things are grim; prices high, rates low, equity returns projected to be slim, not enough to meet liabilities for some…
“Returns are extremely skimpy thanks to the central banks lowering the capital market line,” Marks said at the Bloomberg summit, where he was interviewed by Bloomberg Television’s Erik Schatzker. “We have very, very low prospective returns at the same time that we have macro uncertainty. That’s an unattractive situation.”
This is what I keep pointing out, the current 25X P/E on SPX is materially understated, due to all this buyback manipulation…
Q2,’16 buybacks helped 26% of issues increase EPS at least 4%.
Because they haven’t been investing in the future, they know it’s likely down hill from here…
About the only thing with less precedent than the benchmark index’s six-day streak of alternating up-and-down moves since Alcoa Inc. reported results has been the refusal of companies this earnings season to say anything to help clarify their future. There were 20 instances of any kind of quarterly or annual profit guidance this month through Monday and 21 in September, roughly a third of the usual volume, according to data compiled by Bloomberg and Bank of America Corp. Last month’s total was the fewest on record.
Good points. The lack of investment from businesses only necessitates the need to do so in the future. Buffet even mentioned this about his railway company. He see’s some major investment costs coming up in the next decade. This is kind of how I see things for the entire western world. There is a disparity between the kind of products we are capable of making and the products that are being put to market. We need to overhaul the economy before we can break through that revenue growth ceiling. As I said in my first comment, this means higher wages for workers, renewed investment from businesses, normalization of policy rates, etc. I think in 10 years time we will be well past all this stuff.
In hindsight you can say ya sure the business world was right not make investments at previous rates (overall, obviously some industries have flourished and were making significant investments), economic performance was weak and thus prospective returns were low enough to dissuade investment. Thing is though, I’m extremely bullish on the entire world’s economy for the rest of my lifetime. I can’t picture a stagnating world for the next 50-70 years. Long-term economic factors of land labour and capital (or labour capital and TFP if you will) are simply too strong. The world will boom harder then ever before. Going forward we’ll likely see some noticeable changes in the makeup of the S&P list. That’s what I love about indices. Industries come and go, but the S&P is still there.
weird statement. what does that even mean? you love some aggregated piece of data more than the excitement brought by individual companies?
I think I get where that’s coming from: companies can go bankrupt, but it’s rare that everything in an index goes to 0 (usually that involves revolution or losing a war).
It’s a rational statement. You can buy a dynamic list of the 500 largest companies, and not have to make decisions about individual industries or companies, ever.
does the market really go to 0 even when losing a war?
It can.
Remember that the causality was: if the index went to zero, losing a war may be the reason. I think the last time this happened was WWII, though maybe it happened in Iraq.
That’s different than: if you lose a war, your market goes to zero.
if by losing a war you mean every private asset in your country has been turned to nuclear dust and every company’s foreign assets are expropriated, or turned to nuclear dust, then yes.