JPMorgan’s Guide to the Market breaks down what’s cheap and what’s expensive now that we’re well into 2015
US equities are down slightly since the beginning of the year, and according to JPMorgan’s first quarter Guide to the Markets that came out this week stocks are fully valued compared to historical averages but not exactly high by most measures.
Large-cap blend stocks cheapest valuations versus history
If you compare PE multiple to the 20-year average, large-cap blend stocks (ie a mix of value and growth) are fairly valued at 16.3x compared to an average 16.1x while large value stocks have the lowest PE multiple at 15.9x. Mid-cap value stocks are the most expensive relative to history, 17.1x versus 14.3x, but small-cap growth stocks have the highest valuations at 20.8x.
Energy stock cheapest, most expensive depending on which PE multiple you look at
The energy sector is the second-worst performing so far this year, down 4.8%, having already given up a lot of value in 2014, but if oil prices remain low we could see that poor performance continue alongside it. Financials have lost 6.9%, making them the worst performing sector so far, while utilities and healthcare lead the pack simply by being in the black (2.4% and 1.2% up respectively).
Unsurprisingly, energy stocks have the lowest trailing PE at 12.7x, but they also have the highest forward PE multiple, 24.7x, which shows just how pessimistic analysts are about their future earnings. Telecoms are exactly the opposite, with 23x trailing PE and 13.3x forward PE multiple.
Equity valuations: S&P 500 looks fully valued compared to 25-year average
The S&P 500 overall is above the 25-year average, but only barely so (it’s well above the ten-year average, but the financial crisis makes that a misleading benchmark to measure against). The PE multiple is 16.3x versus a 25-year average of 15.6x and a standard deviation of about 3x, the current Shiller PE is 26.8, slightly above the 25.3 average, and price-to-cash flow is almost exactly at average levels, 11.4 versus 11.3. If you go by price-to-book, the S&P 500 is even a little bit below the historical average, 2.7 versus 2.9.
Cash holdings level off
One interesting tidbit from the JPMorgan first quarter Guide that’s not directly related to market valuations is the amount of cash companies have on their books, which has leveled off. One reason that some investors have been pessimistic in recent years is that buybacks and cash as a percentage of assets had both been growing pretty rapidly, implying that companies couldn’t find anything productive to do with their earnings. Seeing those trends reverse could be a signal that business really is rebounding, not just pushing up asset prices.