I hate to be the one to bring this up, especially since I am such a raging bull.
But apparently, “historical P/E multiple” is a very abused description. It’s all about the data you use says Goldman Sachs equity strategist David Kostin.
At this year's Sohn Investment Conference, Dan Sundheim, the founder and CIO of D1 Capital Partners, spoke with John Collison, the co-founder of Stripe. Q1 2021 hedge fund letters, conferences and more D1 manages $20 billion. Of this, $10 billion is invested in fast-growing private businesses such as Stripe. Stripe is currently valued at around Read More
Kostin issued a report over the weekend to explain why the market is so pricey, chock full of graphs and tables that help visualize it. But his words below do a great job of getting the point across…
“The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.
Reflecting on our recent client visits and conversations, the biggest surprise is how many investors expect the forward P/E multiple to expand to 17x or 18x. For some reason, many market participants believe the P/E multiple has a long-term average of 15x and therefore expansion to 17-18x seems reasonable. But the common perception is wrong.
The forward P/E ratio for the S&P 500 during the past 5-year, 10-year, and 35- year periods has averaged 13.2x, 14.1x, and 13.0x, respectively. At 15.9x, the current aggregate forward P/E multiple is high by historical standards.
Most investors are surprised to learn that since 1976 the S&P 500 P/E multiple has only exceeded 17x during the 1997-2000 Tech Bubble and a brief four-month period in 2003-04. Other than those two episodes, the US stock market has never traded at a P/E of 17x or above.”
I bolded the section that stood out most to me. “But the common perception is wrong,” says Kostin. Maybe I need to reevaluate my ideas that this market can easily push to a 17-18 multiple. But I still think it will because enough conditions are right for, dare I say it, this time to be (slightly) different and poke its head above 17X.
So my question is this: How will the momentum multiple expansion continue to win the day in the short-run (3-6 months) and override long-run valuation concerns?