JP Morgan’s third quarter equity playbook contains a deluge of information on the market’s performance over the past ten years including valuation ratios, sector performance metrics, style performance metrics, trends in corporate finances, the development the yield curve and macro economic trends. The report spans 71 pages, so there isn’t really enough space here to analyze the document in its entirety. However, I have picked out a few interesting data points for value investors below.
It is well-known that value as an investment style has underperformed growth investing since the financial crisis but according to JP Morgan’s figures, value has still produced a decent return and in some cases has even outperformed growth.
According to JP Morgan’s data, since the financial crisis market low during March 2009 to date, large-cap value has returned 262%. Over the same period, large-cap growth returned 272%. Small-cap value returned 260%, and small-cap growth returned 282%. Mid-cap value produced a return of 346% compared to a return of only 300% growth. Year-to-date value has outperformed growth. Large-cap value returned 6.3% since the beginning of the year, compared to a return of only 1.4% for large-cap growth. Small-cap value returned 6.1%, compared to a return of -1.6% for small-cap growth. Mid-cap value returned 8.9%, compared to 2.2% for growth.
Unfortunately, while value has produced some impressive returns since the financial crisis, today stocks qualifying as value investments look expensive relative to historic averages. The P/E of large-cap value as a percentage of the 15-year average is 114% compared to growth which is 102%. In other words, large-cap value stocks are now overvalued relative to historic figures. Equities qualifying as small-cap value investments still appear to be undervalued, however. Small-cap value equities currently trade at 99.1% of their 15-year average P/E. Small-cap growth equities trade at 110% of the 15-year average.
These sectors are still undervalued
On a sector by sector basis, the most undervalued sector according to the average forward P/E multiple is Health Care. The Health Care sector currently trades at a forward PE of 15.3, compared to the 20-year average of 19. The Telecom sector is the next most undervalued, trading at a forward P/E ratio of 14.7, compared to a 20-year average of 17.9. The telecom sector currently yields 4.4% compared to the 20-year average of 3.8%.
The most overvalued sector appears to be energy. Specifically, the energy sector is currently trading at a forward P/E ratio of 65.8 compared to a 20-year average of 16.7.
Overall, the S&P 500 index looks undervalued compared to its 20-year average on a forward basis. The index is currently trading at a forward P/E ratio of 16.6, compared to a 20-year average of 17.2. The S&P 500 currently supports a dividend yield of 2.3% compared to a 20-year average of 1.9%.
Note: JP Morgan’s Guide to the Markets – US Data are as of June 30, 2016.