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.
Jan 27, 2015We recently sat down with Som Seif, founder and CEO of Purpose Investments, for another episode of Insighters™, to discuss his outlook for 2015. During our talk he covered his views on Fed policy, the performance of long bonds and outlook, and his outlook for US and Canadian equities, in the...
Jan 27, 2015SIA Charts Daily Stock Report (siacharts.com) The SIA Daily Stock Report utilizes a proven strategy of uncovering outperforming and underperforming stocks from our marquee equity reports; the...
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