Joshua Brown: US Stocks Cheap on 12 of 15 Historical Valuation Measures

Joshua Brown: US Stocks Cheap on 12 of 15 Historical Valuation Measures

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by Joshua Brown, The Reformed Broker

Is the S&P 500 cheap or expensive relative to historical valuation metrics?

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The bubble talk seems to be mostly subjective and depends mainly on who is doing the talking. Someone who’s missed the run-up is more likely to call it a bubble and someone who is first chasing and buying in now is more apt to dismiss the bubble talk out of hand. It’s funny how our opinions depend so much upon what suits our lives and careers best.

The bubble talk is also subjective according to what sector or corner of the market one might be looking at specifically. Pointing to Netflix and Tesla and all the IPOs and screaming “STOCK MARKET BUBBLE” isn’t exactly rigorous. But ignoring the over-the-top bullish sentiment surrounding US stocks these days probably isn’t healthy either. I’m certainly not.

But let’s get back to concrete measures of valuation for a moment…


How many times have you seen “pundits” in the media making bold claims that we’re about to have a market correction and that investors should switch from equities to cash? ~ Jeff Hyrich, Invesco Canada

Savita Subramanian put out a Valuation Cheat Sheet yesterday looking at sectors and industries individually and the overall market as well.

The best chart from the research piece looked at the S&P’s current valuation based on 15 popular measures. It found that on most of these, stocks are still cheaper than they’ve been historically (click to embiggen the chart)…

S&P 500: cheap or expensive?

In addition to the metrics contained in this report, in August we examined the S&P 500 across every valuation metric we could think of—we found 15—to gauge whether US stocks still looked cheap vs. history. Here we provide an update of this analysis. Today, 12 of the 15 metrics suggest the S&P 500 is trading below historical average levels, while the trailing P/E and P/OCF suggest the S&P 500 is trading slightly above average levels. Only the Shiller P/E—which bases normalized earnings on the last ten years, when we underwent the biggest profits recession in history driven by excessive leverage—suggests the market looks very stretched.




Lofty valuations at the Growth and Yield extremes
Bank of America Merrill Lynch Equity and Quant Strategy | United States
11 December 2013



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