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.
Oct 30, 2014by Ben Carlson, A Wealth of Common Sense Most investors spend their time worrying about the stock market, but the bond market is in a fascinating place right now. Interest rates are low, but retirees and risk averse investors need sources of income and a less volatile ride than the stock market...
Oct 30, 2014by Don Vialoux, EquityClock.com Pre-opening Comments for Thursday October 30th U.S. equity index futures were lower this morning. S&P 500 futures fell 4 points in pre-opening trade. Index futures...
Oct 24, 2014by Helen Lamanna, AdvisorAnalyst.com Here are this week’s reading diversions for your personal enligtenment. Have an excellent weekend! 18 Great Reminders When You’re Having a Bad Day...
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