Stock prices have been driven by multiple expansion this year, and PE dispersion is historically low, leaving some analysts to conclude that there aren’t any cheap stocks left to buy, but Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS) head of cross asset strategy John Briggs and US equity strategist Robert Ross think that looking at the price to earnings ratio by itself can be misleading.

RBS on stocks valuation

“We do not think stocks are expensive. In fact, in our view, valuations are quite average,” write Briggs and Ross. “We do see that stocks, at ~16x, are on the higher side of their typical 13 – 17x multiple. But that valuation approach ignores the exceptional strength of the balance sheet. This low level of leverage serves to make the P/E multiple appear larger than it is. This can best be seen when an EV (Enterprise Value) / EBITDA valuation approach is used. Seen through this lens, the S&P 500 (INDEXSP:.INX) is trading precisely at its historical mean.”

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Briggs and Ross also agree with the assessment that margins have peaked and will start to fall: “EBITA margins are not excessive, they are quite average,” they write. The breakdown in EBITA margins varies more by sector than EV/EBITDA, but only information technology and consumer discretionary are significantly above historical averages. They also point out that even if the Fed starts tapering, the Bank of Japan and possibly even new LTROs from the European Central Bank will keep putting liquidity into the system.

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Discrepancy between GDP growth and S&P 500 forecasts

Bears might respond that the multiple expansion that has taken place this year can’t continue, and that there is still a discrepancy between projected GDP growth and S&P 500 (INDEXSP:.INX) forecasts, but the analysts are “optimistic on the potential for global growth, multiple expansion” in the long term, especially because they don’t think retail has started investing in equities heavily just yet.

Even though they are bullish, Briggs and Ross think it might be sound to wait for political fights over the budget and the debt ceiling, or some other catalyst, to cause a pullback before putting new money in equities, but they also say that “retail is still structurally underinvested in equities.”