According to Bloomberg data, U.S. stocks are now at their cheapest level since 1990, except for a brief period post-Lehman’s collapse.
Earnings estimates for Standard & Poor’s 500 Index companies from Apple Inc. to Intel Corp. and CSX Corp. climbed 9.1 per cent on average in April, twice the gain in their prices and the largest monthly increase since at least 2006, data compiled by Bloomberg show. The benchmark gauge for American equities is trading at 14.2 times forecasts for its companies’ profits, lower than any time since 1990, except for the six months after Lehman Brothers Holdings Inc. collapsed.
Analysts expect companies in the S&P 500 index to earn the equivalent of $85.96 per share relative to the index.
Of course this ‘cheap’ conclusion requires that A) companies achieve the earnings forecasts analysts have given them and B) can grow their earnings above the current forecast level in the next five years. If they can do both, then yes stocks can be fairly described as cheap right now as shown above. Yet if there’s another major down-leg in U.S. corporate earnings then using this one-year forward price-to earnings (PE) metric above will prove unreliable. Thus whether this PE valuation is valid or not depends on your view of A & B above. We personally look more at individual company valuations right now, especially non-financials, and on that metric there are indeed many very strong and well-established individual U.S. corporations that are trading at historically low valuations vs. their own history yet at the same time appear to have solid growth prospects as well. Think McDonald’s (MCD) & Coke (KO), for example.
Note: The author owns shares of Mcdonalds. Investors the author speaks with may be long or short shares, bonds, or options related to any company mentioned here.
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