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“A Shiller P/E of 34 (as of March 1st) is in the top one per cent of history. Total profits (as a per cent of almost anything) are at near-record levels as well.

Remember, if margins and multiples are both at record levels at the same time, it really is double counting and double jeopardy – for waiting somewhere in the future is another July 1982 or March 2009 with simultaneous record low multiples and badly depressed margins.”

Source: Jeremy Grantham, 11th March 2024, ‘THE GREAT PARADOX OF THE U.S. MARKET!’ https://lnkd.in/gwAv5cwi

Last week, we wrote about eight key issues that are currently vexing the market’s mind. Those are the key debates which, as they are resolved, will drive market direction over coming months.

They included inflation (how sticky is it?), US growth (is it slowing? Is recession a real risk?), the Fed’s QT program (is liquidity as abundant as some claim?), and whether or not a shift in global sector leadership is brewing, among other matters.

We also highlighted the valuation issue in US markets (are ‘the high/rich US stock market valuations a concern?’)

That rich US stock market valuation is well known and has been well covered in many places (e.g. see quote above).

The S&P 500 is trading on one of its most expensive forward PE ratios in history (20.7x), surpassed only in the two bubbles of the past 50 years (TMT & pandemic); the stock market’s risk premium is at its lowest since the TMT bubble (and has fallen/become more expensive in the past two years); while on a price to sales ratio, the S&P 500 is now trading at 2.7x S&P500 sales – a multiple that’s only been higher on two prior occasions (again, in the pandemic and TMT bubble – chart below).

However, while these metrics are well known and it’s widely understood that the mega cap tech stocks (and other mega cap growth stocks, i.e. ‘MAG 7’/‘FANNMGS’) dominate the market capitalisation of the main US index (e.g. see fig 9 in substack publication), it’s less well appreciated how expensive much of the rest of the S&P 500 has become.

Indeed, (almost) all US (GIC level 1) sectors are expensive! Tech is, of course, the most expensive sector in the US stock market (currently 28.6x forward consensus earnings).

That’s widely known.

What is less widely appreciated, however, is that seven of the other 11 top level sectors are also expensive. That is, when assessed relative to their own PE history, these sectors are in their 80th or 90th percentiles – see table 1 (with 100th percentile = most expensive in history; zero percentile = the cheapest). And what's more....

The full piece is published on Substack - click here for a trial (or email nick@longvieweconomics.com)

Fig 1: S&P500 market capitalisation to sales ratio (multiple)Picture2



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