Six years into the current bull market, one of the biggest concerns we’ve heard repeatedly is that valuations are looking rich.
As measured by the price-to-earnings (PE) ratio, the market multiple had been well above average for months. And depending on how you measured earnings and how you calculated your average, you could argue that the multiple had been above average for years.
It was at a level that had many reluctant to buy stocks. And it had some even recommending selling stocks.
And then, August happened. Stocks came crashing down as the sum of many fears seemed to be coming to a head. China had unexpectedly devalued its currency, and markets came tumbling in what appeared to be confirmation of the bearish signal telegraphed by the ongoing rout in commodities.
It was around that time that in a period of two or three days a couple of analysts all flagged the same metric: the PE ratio.
- “[T]he valuation correction does seem in place,” Citi’s Tobias Levkovich said in an Aug. 24 note.>
- “S&P valuation back to normal,” Deutsche Bank’s David Bianco said in an Aug. 25 note.
- “The forward PE is 15X currently, lower than the implied PE of corporate bonds (inverse of yield) and barely above HY (which is barely at a discount),” FundStrat’s Tom Lee said in an Aug. 25 note. “[S]tocks are -0.6 standard deviation from long-term average, or cheap.”
- “[T]he S&P 500 PE ratio fell to 15.5x, a level not seen since October of last year,” Barclays Jonathan Glionna wrote in an August 25 note. “As shown in our poster report titled Is 17x earnings expensive?, the S&P 500 total return for the next 12 months has averaged over 11% and 20% for PE ratios of 15x and 16x, respectively.”
And so on August 26, we published “One good thing has come from the stock market rout.” It was an opportunity for all the valuation worryworts who were reluctant to buy with valuations so high.
That day, the S&P 500 opened at 1,872. This was the same week the index set its 52-week low of 1,867.
Today, the S&P is at around 2,060, up 10% in just four months.
Admittedly, we are cherrypicking posts here. And while we are not in the business of giving investment advice, we can comfortably recommend that you do not trade on any single post you read on BusinessInsider.com.
Having said that, if you read Business Insider, subscribe to the Markets Chart of the Day email, or follow @chartoftheday on Twitter, you can’t exactly say you didn’t know this correction in valuations occurred.