We love this way of looking at stocks — What percentage of a stock’s current price represents zero growth expectations for the company? It’s a nice way to find your bearings when thinking about the price you pay for ar company vs. what kind of expectations are baked into that price.
The surprising thing is that the S&P500 is priced as if its collection of companies will never grow, as shown by the blue line in a chart from Tobias Levkovich below (line it up with the left-hand axis).
Citi’s Tobias Levkovich:
To be fair, our Panic/Euphoria Model (see Figure 11) and our implied long-term earnings growth expectations tracker (see Figure 12) both argue for significant stock price gains over the next six and 12 months and thus we maintain a bullish view and thus far we are buyers on market pullbacks.
In terms of valuation, the above chart shows that we truly live in interesting times. Markets are obviously focused on the potential for declines in profit, but even if the U.S. economy still has some turbulence ahead, should we expect profits to never grow again? That’s like saying the U.S. economy will never grow again.
You know how .com investors were berated for saying ‘This time it’s different’? Now bears are arguing ‘This time it’s different’ when it comes to long-term valuations.
Sure, nothing is impossible, growth theoretically could stall forever, but for patient investors, a quick glance at the history of economic growth and corporate profits says that it’s extremely unlikely to happen. Even weak long-term growth, any growth, could make make current prices cheap for long-term investors.
Note we dug this chart out from an August 6th Citi strategy piece, ‘The Earnings Impact’. While it’s a few weeks old, the S&P500 was close to where it is now, thus it remains relevant.