- Traders are paying the most relative to the S&P 500’s price/earnings-to-growth ratio in more than three decades, Bank of America wrote in a Thursday note.
- Bank of America began tracking the PEG ratio in 1986, and the index’s current ratio of 1.8x is the highest the bank has observed.
- The S&P 500’s price-earnings ratio recently hit its highest level since 2002 at 18.6x.
- The US market “is running on fumes,” BofA strategist Savita Subramanian wrote, and stocks could see “multiple compression” before the year is out.
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US stocks are the most overvalued they have been in at least three decades judging by their price/earnings-to-growth ratio, according to Bank of America.
The S&P 500’s PEG ratio sits at an all-time high of 1.8x, the bank’s analysts wrote in a Thursday note, adding that they only began tracking the measurement in 1986. A PEG ratio above one typically means a stock is overvalued relative to its long-term earnings growth expectation.
The PEG metric is calculated by dividing a stock’s price-earnings ratio by the growth rate of its earnings over a specific period of time. The ratio is often used to determine a stock’s value while also factoring in expected profit growth.
The major index is only 1% away from the bank’s year-end target of 3,300.
“The S&P 500 is running on fumes,” bank strategist Savita Subramanian wrote. “We have pulled forward some of the gains from later this year, and could see some multiple compression.”
Amazon and the index’s energy stocks are the main culprits to watch for a pullback in the forward-looking ratio, she added.
The S&P 500 also trades at a price-earnings ratio of 18.4x, its highest level since 2002. The simpler multiple was mostly fuelled by the S&P 500’s dividend payout ratio, as shareholder payments have grown rapidly over the last decade.
“Payouts aren’t likely to get much higher from here, and thus further P/E expansion on cash return is less likely,” the team wrote, adding that financial stocks are “one sector with more upside in payout.”
The bank used 20 different valuation methods to judge whether the 500-stock index is overvalued. The S&P 500 is undervalued only on the basis of price-to-free-cash-flow, according to BofA.
As for the fourth-quarter earnings season, the health care sector “screens best” based on predictive metrics, the team added.
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