• 363 days Will The ECB Continue To Hike Rates?
  • 364 days Forbes: Aramco Remains Largest Company In The Middle East
  • 365 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 765 days Could Crypto Overtake Traditional Investment?
  • 770 days Americans Still Quitting Jobs At Record Pace
  • 772 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 775 days Is The Dollar Too Strong?
  • 775 days Big Tech Disappoints Investors on Earnings Calls
  • 776 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 778 days China Is Quietly Trying To Distance Itself From Russia
  • 778 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 782 days Crypto Investors Won Big In 2021
  • 782 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 783 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 785 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 786 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 789 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 790 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 790 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 792 days Are NFTs About To Take Over Gaming?
Billionaires Are Pushing Art To New Limits

Billionaires Are Pushing Art To New Limits

Welcome to Art Basel: The…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

Prieur du Plessis

Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in…

Contact Author

  1. Home
  2. Markets
  3. Other

SP 500: Caveat Emptor!

The S&P 500 Index is entering expensive territory with the cyclically adjusted price-earnings ratio at 22.64 approaching the average of 25.0 from the post ICT crisis to the advent of the Lehman debacle. The current level is also at the upper end of the range that existed from 1881 to the start of the ICT bubble in the latter part of the 1990s.

S&P 500 Cyclically Adjusted Price Earnings Ratio

On the normal basis, with the PE calculated trailing 12-month earnings, the market is inexpensive at 17.86 times earnings compared to the past 20 years. However, the market is expensive compared to the long-term historical average of 15.5 times earnings.

S&P 500 Price Earnings Ratio

The Q Ratio defined by Doug Short as the total price of the market divided by the replacement cost of all its companies is currently at the upper end of the range since 2003 and near the previous peaks in valuation since 1900 bar the ICT bubble in the latter part of the 1990s.

Q Ratio Since 1900
Source: dshort.com

Sitting on a price to book value of 2.3 times the S&P 500 is still significantly below the average at 2.3 times compared to 2.9 since 1981. Barring the ICT bubble the average is closer to 2.5, though.

S&P 500 Price/Book Ratio
Sources: Various internet; Plexus Asset Management.

If the S&P 500's long-term historical earnings growth of 6% in real terms is factored in and given the average dividend yield of 3.7% of the S&P 500 over the past 70 years, the capital return over the next seven years is expected to be minus 1.1% per year. If the exit dividend yield turns out to be that of the past ten years' average of 2.1%, though, the capital return will be 6.1% per year.

Future 7-year returns for S&P 500
Sources: Hussman Funds; Plexus Asset Management.

In light of the extended valuation levels I think the market is currently discounting the latter and view it as close to the upper limit of what can be expected. I will treat any further significant strength in the market with the utmost caution.

At best, it seems to me that year-on-year growth in the coming years could range between 0% and 10%.

S&P 500: 12-Month Momentum

The declining trend of the peaks in the Coppock indicator of the S&P 500 is also worrisome, indicating that further significant upward momentum will be a hard-fought battle and not without risk.

Coppock Indicator

The technical position is also telling me that a significant correction may be in the offing.

S&P 500: 13-Week RSI

Caveat emptor!


Back to homepage

Leave a comment

Leave a comment