U.S. Stocks Are Cheap But Can They Get Cheaper?


  • Mar 06: The deep slide in U.S. stocks to 12-year lows along with lowered economic expectations has sapped investor sentiment and led many on Wall St to wonder how low equity markets can go. U.S. stocks are now down from their all-time peaks in Oct 2007 by more than 55%, eclipsed only by an almost 80% plunge after the crash of 1929. About $11.1tl in market wealth as measured by the DJ Wilshire 5000, which encompasses most U.S. public companies, has been wiped out during the plunge. Many investors now believe that stocks will take longer to recover than previously expected, a shift from the optimism at the end of 2008 when many thought the worst had passed (Reuters)
  • Mar 03: Rogers–>U.S. stocks may rally because of the enormous amount of money the government is pumping into the U.S. economy, but it’s not going to last. I don’t think the bottom is here, maybe ‘a’ bottom, but not ‘the’ bottom. The economy is going to get worse. You can’t have a good stock market without a good economy (Reuters)
  • Mar 03: Doll–>We have broken down and therefore the repair process to create a bottom and to create a foundation sort of has to start over again. It doesn’t mean we have to erase all the work that the markets have done to build a base and repair from the Nov 2008 lows. It just means it does have to go on for longer (Reuters)
  • Draughn (Jan): Earnings projections for S&P 500 are $42.26 for 2009. That makes the forward P/E 22. That doesn’t look like value at all, when the historical average is closer to 15
  • MS: Equity valuations are not cheap enough to compensate investors for earnings risk. The Graham-Dodd P/E (based on trailing inflation-adjusted 10-year earnings) is now marginally below its long-term average as of Dec 15. An alternative measure, based on the long-term profit share of GDP, remains above average
    • CLSA (via Bloomberg): According to Tobin’s q, S&P 500 is too expensive relative to the cost of replacing assets. S&P may plunge another 55% to trough at 400 by 2014
      Merrill Lynch: Fed model suggests equities are undervalued. Valuations are well below long-term averages
  • PIMCO: Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future
  • GS (not online): Low global real yields are likely to remain in place, supporting equities. US equity market looks inexpensive on a forward P/E basis – S&P 500 trading at 12.9x forward earnings, below 20-year average of 15.6x. Current valuations imply only 1% earnings growth per year over next 5 years, below 10-year historical average of 18% implied earnings growth for the S&P 500. Market undervaluing future earnings growth
  • JPMorgan (not online): Average PE multiple of 12x reached at the end of previous bear markets is well below current 16.2x but historical average may be depressed by “abnormally low” P/Es in 1970s due to inventory overstatement, depreciation understatement
  • See Stock Valuation Caveats for common problems in valuation
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