Is It A Myth That Stocks Are Super-Cheap?

One of the biggest arguments for the bulls is that the S&P — despite its big runup — is still ridiculously trip by historical standards.

Take a look at some big tech stocks, and you can see rock-bottom PEs (especially on a forward basis).

David Schawel at Economic Musings suggests taking this “cheapness” with a grain of salt.

First he notes that yes, PEs, are cheap.

chart

Photo: Bloomberg

But here’s the rub.

Margins are extremely high — after a period of aggressive cost cutting — and they’re even expected to go higher next year.

Margins

Photo: Economic Musings

So yes, stocks are cheap, but they assume the sustenance of record margins.

And so it seems that something has to give. Either estimates have to come down, or the market needs to re-evaluate stocks (probably higher). It could go either way, but just be aware that that there’s a big catch to the idea that stocks are “cheap”.

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