Bloomberg has an interesting article today titled "U.S. Stocks in Longest Valuation Slump Since Nixon." Written by Inyoung Hwang and Whitney Kisling, the piece highlights the fact that the S&P 500 hasn't traded above its long-run 16.4 mean P/E ratio for 446 days, which is the longest stretch since the 13 years beginning in 1973.
Well, when you compare less than 2 years to 13, the "drought of exuberance" doesn't sound so dramatic. But having only been as high as 13.82 on the market multiple this year, likely the highest since the recovery got rolling, the logical extension of the mean valuation argument does sound dramatic. From the authors...
"Should earnings match analyst forecasts and climb to $104.78 a share, the index would have to reach 1,718.39 to trade at the average ratio of 16.4."
All this got me fired up about my favorite contrarian topic...
Given the healing time required for a systemic, generational housing/banking crisis in the US and a sovereign debt crisis in Europe, are institutional investors ignoring the power of the global growth story and being too cautious in their valuation models?
In other words, do global growth and corporate profits justify paying over 15X forward estimates now? Or are those estimates destined to keep coming down in your view?
Forward estimates may have already slipped below $104. Will they slip further because the GDP input will keep coming down?
I still think that global growth and earnings will surprise to the upside this year. And therefore, I think that PMs are too cautious.
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