Over the weekend, we humbly suggested that the dream of ongoing US equity market multiple expansion may be over. It would appear SocGen not only agrees but finds current valuations very stretched. On the basis of Price-to-Book (valuation) and return-on-equity (profitability), the US equity market is extremely ‘expensive'; and “hoping” for further expansion on the RoE to save the day is whimsical given the limits to leverage. Still, despite Obama’s sell signal, it appears from today’s open that the BTFATH crowd remains alive and well.
The chart below illustrates a strong and rational link between profitability (as measured by Return on Equity) and valuation (price to book value). The more profitable a market, the higher its valuation. Along with Switzerland, the US equity market generates the highest return on equity and profitability. Both markets have been considered a safe haven over the last few years.
Like for the valuation, the gap between the RoE for US financial stocks (9%) and non-financial stocks (17%) is huge. Excluding financials, US RoE is already back to a high level and has stopped rising over the last 2 years.
It was higher in 2007, but with much more corporate leverage.
Nov 20, 2014Overseas Influences by Anthony Valeri, LPL Financial · Demand from overseas investors once again helped the bond market shrug off stronger economic data and weak Treasury auction demand. · Favorable yield differentials between Treasuries and key overseas bond yields may provide lingering support...
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Nov 20, 2014by SIACharts.com For this weeks SIA Equity Leaders Weekly, we are going to revisit the broad U.S. and Canadian Equity markets. We looked at both of these market indices during the last market...
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