VALUATION UPDATE Q3 2020
With earnings estimates continuing to fall for 2020 it does not look like valuations will get better any time soon.
The following chart from FactSet illustrates the divergence between stock prices and earnings. Stock prices generally follow earnings. The deviation is not a positive since earnings are not likely to rapidly catch up to price any time soon [not to mention that the overall return is largely embedded in a concentrated list of highly valued companies]. It is possible that price will revert to the earnings trend first.
Forward Price/Earnings Ratio valuations the highest in the past 10 years, courtesy FactSet.
Valuations are packed into high priced stocks, as indicated by the chart below where the ratio of the value of the NASDAQ 100 has approached the over-valuation of 2000 where the value of the NASDAQ 100 has become 3 times that of the S&P 500. Sustainable?
Chart courtesy of Lohman Econometrics.
This concentration can be seen in the 70 year relative data chart below (courtesy Bank of America) where the valuation of US equities, versus Developed Market equities ex-US, is now 2.3 times and well outside of the one standard deviation metric that we were taught was standard in scientific circles, back in high school (meaning that ventures into the lower probably category doesn’t last long).
All of this explains the following chart from Refinitiv where we can see investors moving monies out of stocks. The financial industry tracks sales to the penny, posting information weekly and monthly. This explains how the overall market can be propped up by a few super-cap stocks with high valuations, masking what is going under the surface broadly.
It’s data to be aware of and information to factor into the risk reward.
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DEFINITIONS
NASDAQ 100 Index: The NASDAQ-100 is a stock market index made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. It is a modified capitalization-weighted index. The stocks' weights in the index are based on their market capitalizations, with certain rules capping the influence of the largest components. It is based on exchange, and it does not have any financial companies. The financial companies were put in a separate index, the NASDAQ Financial-100.
S&P 500: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
The index is a capitalization weighted index of the 500 large companies listed on various stock exchanges (such as the NYSE or NASDAQ). The S&P 500 was developed and continues to be maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global. The S&P 500 differs from the Dow Jones Industrial Average and the NASDAQ Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market.
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