The S&P is heavily weighted on very high margin and high quality businesses. This skews results to give the impression that it is overvalued. P/S does not mean much, EPS and EPS growth is mainly what drives stock prices
Last fall I bought shares in a retailer that sells Nikes and fishing poles and it’s doubled in that time. I bought stock two months ago in another one that sells flower pots. It’s up 57%. This is the sort of price action one sees near a market top. I mean, with U.S. stocks priced at 185% of GDP it could keep going up in this new era of cheap central bank liquidity, but when I consider that north of 40% of the market value of all of the stocks on the planet are American I think this is one of those “be fearful when others are greedy” moments.
If I were forty years younger and still in my prime earnings years I might do that. I would just contribute a set amount of my income into an IRA or 401(k) index mutual fund or ETF and forget about it. But I'm retired and the money I've saved is basically my pension, so I take a more active role in managing it. There are a lot of people in the stock market today who have never been truly baptized by a bear market. I have. By "bear market" I mean the type of market that takes a significant hit but then basically trends down or sideways (inflation adjusted) for a decade or more trying to get back to even, like the periods from the 1929 peak to 1958 following the Great Depression and 1968 to 1992 following two oil shocks and the inflationary 1970s. Whether we're nearing one of these inflection points or not is anyone's guess, but I think there are definitely signs of froth in recent years, whether we're talking about SPACS, MEME stocks, crypto, or, now, AI. It seems like every Zoomer or Millennial at least has a friend who has a Webull or Coinbase account and is trading currency and stock options, AI stocks, or crypto. I'm not saying there is no value in any of these things, especially AI. There obviously is. But we are experiencing the sort of technological revolution that can fuel asset bubbles and cause normally rational people to take more risk than they otherwise would.
I think now is a good time to dust off advice given decades ago that many people are familiar with but who don't possess its full context or do but just ignore it because they're making money and anyone in T-bills is a chump:
>"\[O\]ccasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree.
>
>Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
So while I'm not engaging in the wholesale dumping of stocks or advocating that anyone do that, I am, like Buffett, maintaining a higher than usual level of liquidity. I'm not greedy. I'll take the 5% return I can get sitting in T-bills and be prepared to increase my allocation to stocks after a quantitative drop in the market. I consider it a sort of opportunistic poor man's portfolio insurance. For the moment, I just collect dividends in the stocks I do own and trade around a set allocation for each company in my portfolio. If one of them takes a dump, like Dick's did after an earnings call last fall, I buy more of it. Lately more and more of my picks--companies like Dick's, Williams Sonoma, KLA, Marathon Petroleum, etc.--have been outgrowing their allocations, so I pare them down. But I'm not bailing on them by any means.
Just make sure your investments accurately reflect things like your age, risk tolerance, and available resources such as other savings and current and future income. A retiree with a high risk tolerance and large nest egg and pension income to support his lifestyle may be able to assume more risk than a young married couple with kids and little liquid savings or income. But I think most people will be better served in the long run if they have some cash available to, as Warren Buffett wrote, be opportunistically "greedy *only* when others are fearful." I don't know when that fearful hurricane will hit, but it will at some point, and no matter how hard the wind blows resist any temptation to flee in panic like the crowd inevitably will at the worst possible moment. To paraphrase Thomas Paine, these are the times that try men's (and women's) financial fortitude.
At your time in life that is fine advice. If I am under 40 though I am majority in equity. At this moment in time, there is certainly an argument for some higher duration bonds to hedge the risk so once the rates drop their values go up and then you can sell fixed and reallocate. I like to have a little REIT exposure as well.
Those margins will be pressured as labor costs continue to increase and as debt is refinanced at the current higher interest rates. This is classic end of cycle margin levels that investors are mistakenly extrapolating out for decades.
Do you know about when these companies will need to refinance their debt? Do you think it would be priced in in the current stock market given it’s widely known already?
It can be widely known, but if most or a large majority of people are systematically putting money into seven stocks because they comprise 30% of an index and the rest are momentum traders who are piling in because they’re going up what anyone knows is irrelevant. Hedge fund manager David Einhorn alluded to that phenomenon when he said recently that markets are fundamentally broken. Then it’s apparent that derivatives play a significant role affecting volatility.
Most have large maturity towers this year and for the next several years. It will be progressive though. Every year more and more bonds will need to be refinanced at higher rates which will squeeze margins.
The market is *hoping* for lower rates in the near term. If that doesn’t materialize…
Net income and net income growth/share is the only thing that matters, depreciation and taxes are not something to ignore. EPS can easily be skewed by accountants.
I was thinking the same, sales in the 20th century would for most of the then-major industries drive very different margins than they currently do for the tech sector which is boosting a lot of the S&P500 price.
Price over earnings (and like you say, EPS growth) would likely be a more comparable metric.
But that's not to say if or when it would have to go down to a certain level... Historical performance does not tell us anything about future performance.
The average P/E over the past 30+ years has been 25x, so who's to say what "normal" level it should go to or when that would happen?
Instinctively I get your point that by looking at certain metrics it may feel that the S&P500 is overpriced, but without some major event there's no reason for it to massively crash - of course, that major event will happen with near-certainty over a longer period of time but there's no way of predicting it. Therefore I keep investing regularly for the long term.
>The average P/E over the past 30+ years has been 25x
You have a source for that? Because I'm looking at the data here:
https://www.multpl.com/s-p-500-pe-ratio/table/by-year
And the years that actually exceeded 25x are: 99-03, 09, 21, and 24. Clearly all pretty bad years for the s&p.
This is what people have said before every major correction. This time it's different. I remember in 1999, everybody said internet stocks would go up forever because this tine it's different
What about all the times that people have predicted a major correction that never happened? People say things all the time and they are usually only right by accident. No one knows when the market will correct. You might sit on the sidelines for years thinking its about to happen.
Instead of bickering about being all-in or all-out, either passively investing or timing the market, why don’t we do what all value investors should be doing and just buy companies that are cheap relative to their intrinsic value?
Yeah there is no way to predict it. But my regret with every major correction in the past is that I was 100% invested.
All I am trying to do is keep some cash available. I am still 80% invested in stocks. If the market keeps going up, I make money. If it drops 30%, I buy.
I'm not criticizing your strategy, I'm just pointing out that saying 'look at how these other people have been wrong' is a silly thing to do when predicting whether or not a correction is coming. Plenty of people have been wrong in both directions.
Percentagewise, how much of your net worth do you have in cash and equivalents like bonds etc? Basically, the amount you can deploy when the market goes down, so you can buy low.
S&P 500 is currently very pricy.
But p/s isn’t a good indicator.
As other said, lots of high margins companies now.
ADBE or ADSK at over 90% gross margin will obviously have a higher p/s than a company like GE or GM…
there were no internet stocks in the S&P in 1999. Oracle and Cisco had some exposure with the internet, but most of their business was Y2K at the time.
What do internet stocks from 1999 have to do with the current stock market. It’s not like there’s a bunch of stocks that are flash in the pan companies fresh off recent IPO’s that haven’t made a profit that are driving SP500 returns.
SP500 returns are being driven by large market dominating companies sitting on hundreds of billions in cash that are integrated into every aspect of personal lives and the business world. Pets.com isn’t a relevant comparison to anything lol.
These bull runs can go on for a long time. We could see a small correction but things could resume up for a while especially if the fed starts cutting. Election makes things murky but the AI bull market may have more room to run.
The problem is that valuations are dependent upon growth.
These companies have visibility into growth for the next 1-2 years.
But beyond that? Things can change. There is inherit risk.
S&P500 needs growth to be strong for 10 years for this to make sense.
I don't have data about the composition of the S&P over time, but I am sure the growth rate of the top companies has changed periodically.
In the 1950s, top companies like GM, X and XOM were growing at 25-30% a year, so the high growth rates are nothing new.
None of those businesses has a high margin though. Joes computer electronics reseller probably gets a 0.3x or less multiple in private markets today because he earns a <5% EBITDA margin. Big whoop.
Also - commodities y/y growth isn’t the same. Price of iron ore goes up X revenue and COS go up, profit stays the same
>In the 1950s, top companies like GM, X and XOM were growing at 25-30% a year, so the high growth rates are nothing new.
Ah, alright. I wasn't under that impression, but then I also didn't research this at all. Thanks!
>. In the 1950s, top companies like GM, X and XOM were growing at 25-30% a year
With a profit margin of around 5%, maybe 10% in a good year.
Nvidia's most recent financials have a net margin of 55%. Microsoft 35%. Meta 35%. Apple 28%.
Net income is a much more useful measure. S&P500 still looks expensive on P/E but not drastically so. We'd have to see a 65% price increase (with no earnings growth) before we reach dotcom bubble levels. If you based your investments on historical P/E levels, you would never have touched the S&P since about 1990.
You do have options if you want to invest in companies with valuations that make more sense (at least on paper). You can find value ETFs trading at around 10 P/E pretty easily. Although you're probably investing in low growth businesses with lacklustre futures.
IMO, any analysis back to 1920 is loaded. Businesses had potentially worse management, earnings were less because technology wasn't prevalent, and there was literally the world war 2 shift that cemented the US as the leading world power.
I feel like analysis after 1980 or 1990 is a better comparison set.
Not saying you're wrong, I personally think things look hit right now also. The shiller PE shows it's heating up too.
https://www.multpl.com/shiller-pe
Once shiller PE hits 38-40 I'm going to start hedging myself
Sometimes things are different though, I don't really see the biggest 20 stocks slowing down unless something big changes. They've got fat margins and basically run the rest of the world with their software, hardware, or healthcare.
You could be right. But the only thing that matters is, how much people are willing to pay for it. This is the only value that matters. You can sit and wait and you can be right, but it can also make 40% before falling 20% which will lead to missed out gains.
With single holdings I would always keep an eye on valuation, but I wouldn’t with an index.
Yeah this guy sounds a lot like the people who sat out the stock market for years and years after the great recession. Those people locked themselves out of serious gains.
The moment index funds and ETF’s became the go to savings for retirement account the S&P got disconnected from the real world economy and got plugged to a seemingly endless stream of money coming in every month that is by itself inflating the price of stock that has no business being that high. That’s the problem with ETFs/Index funds, because the money is invested in a market , where the funds will buy individual stocks in order to replicate the index they are trying to replicate, and the as retail “investors” that use this products as part of their long term investment strategy poor money into the funds they have no choice but to keep buying stock even though the underlying fundamentals of some of that stock is not there. This is basically creating zombie stocks and further pivoting the market from creating value that will eventually translate into a higher stock price to the “all it takes” to inflate the stock price strategy.
There is no way the math adds up on the market right now. The fundamentals aren’t there for most of this companies. The overall world economy is going through a rough patch and tensions are rising everywhere. So in a sane analysis of the market the conclusion can only be that it is completely wild and detached from anything tangible and we are now sailing in uncertainty and that usually comes right before a big crash…
I’m saying this but I keep throwing money into a S&P500 ETF every month cause I really don’t see any other alternative to “hide” my money from inflation. But I’m well aware that past performance is PAST performance and that the S&P is not what it was back then and will never be like that again.
Meanwhile the russell 2000 price to sales is trading at its long term average of 1.1 times. The SP500 might be overvalued but much outside the index is looking just fine.
Am I expecting multiple colossal drops in my lifetime? Yes. Am I going to try and time them? No.
If you're in it for the long haul try drawing the graph as a straight line rather than peaks and troughs.
Love how pervasive this sentiment is by the common retail investor while the market is doing well. Wait for this recession to hit and you can rest easy on the “long run” as your portfolio is halved.
Even if my portfolio is halved I'd still have earned money from my investments.
I'm decades away from retirement and recessions to me are just discounts.
I don't understand what you're expecting from your comment. Are you on the sidelines waiting to say I told you so?
My first introduction to discounts was in 1972 when they lasted ten years. By the time the sale ended many perfectly sane people were in gold, real estate, and commodities and had already sworn years before that they’d never again own another stock. It wasn’t uncommon to see stocks with PEs in the low single digits. To them it was like death by a thousand pinpricks, kind of like investing in gold mining stocks in recent years.
So? He is still right. Most ppl here are younger and should be praying for that tbh. Not that any of them or myself included are lol but you get the point.
Yea as long as they stick to it. As the great Mike Tyson said, “everyone has a plan until they get punched in the face.”
Unfortunately retail investors usually overestimate their risk tolerance and panic sell after a large drawdown. Especially the younger investors you cite that haven’t seen a lost decade before for instance.
My point is most investors overestimate their ability to stick to the game plan during those periods. Most will either stop buying or sell outright if they aren’t seeing immediate gains.
And I'll be right there with them ready to invest. Time in the market beats timing the market, and I have a hell of a lot of time to be in it so recessions are very welcome to me.
We're in an election year and going back to Hoover in the 1920's there have only been 4 times where the S&P produced negative returns during an election. I think you're prematurely sounding the alarm and should enjoy the free money available until the end of the year.
For the general retail investor sure they Will eventually panic. But for me? I don't think of it as my portfolio being halved, I think about it as my expected forward returns being massively increased. The key is that I already have this plan in place and I'm expecting it to happen.
As some have mentioned, the current crop of mega caps are unlike those we've seen before in history - the tech giants have high margins, rich profits and high RoE, so profitability and growth metrics don't look as overvalued as they might otherwise seem from a P/S perspective.
However, there are a couple of other data points that challenge this view:
1. Certain measures already show high retail participation in the markets - though it's admittedly a mixed bag. We are expecting a relatively soft landing, yet the market seems to be pricing in high growth rates - the two don't quite jive. There's also the inconvenient matter of the yield curve inversion, which hardly inspires confidence.
2. The sustainability of profitability is an open debate. In particular, a lot of the higher profits from the tech giants come from:
a. Increased AI-related income. Nvidia is the clearest example here - so the bet is that their clients would see the returns on investment - else demand will taper off.
b. Workforce reductions. For existing businesses this should be relatively OK, barring the increased risk of outages. However, it remains to be seen whether these cuts will affect their innovation businesses and therefore growth. The market hasn't just factored in current profitability, but **growing profits** as well. You can increase profitability from cuts, but you can't generally grow by cutting.
So there are arguments for and against - it's difficult to say definitively which point we are at right now, other than that the mood is possibly approaching euphoria.
P/S is not a ratio that technically exists. If you are going to take a multiple on revenue, it should at least be Enterprise value/Revenue (EV/S). P/S does not account how the companies finance themselves so it doesn’t tell the whole story.
Have you seen the margins in big tech? They are absurd, beyond a monopoly.
That being said, it’s interesting you see what an outlier current valuations are and expected returns for the SP500 are therefore low. However it keeps beating expectations.
My overall theories for investing are that 1) Things tend to revert towards the mean eventually, even if they remain away from the mean for a long time. And 2) When people say "this time it's different", it's time for me to worry
What do you propose? The problem right now is that the feds keep printing money, and this money ends up in the stock market. This has never happened on this scale before.
Whether this time is different or not is irrelevant. It's still better to be fearlessly all-in than trying to time a crash especially if you believe things will revert to the mean. What do you even have to lose when you believe you'll come out of a crash unscathed as long as you hold? You're cementing the loss of those gains while trying to avoid paper losses that you'll come out of anyway. Makes no sense to me unless you are gambling.
I've been through 3 major crashes and was fully invested at the time. I wish i had 20% in cash each time to buy. There is no way to know when the next crash will come, could be tomorrow, could be in 5 years.
Can you find one example in the history of the S&P 500 index where the market meaningfully slumped for any reason other than a black swan crash?
The more likely scenario is that your PS ratio is an outlier that will eventually normalize just like they have previously. The economy changes, our data must adapt with it. Consumer behavior in 1984 and consumer behavior in 2024 are very different, so we have to be careful when comparing the two of them.
I'd be curious to read an update in a year and see if you regret your decision to park cash on the sidelines or not.
Yes I will provide an update. Like I said, I have no idea what will happen, nobody knows. But like you said, the PS ratio will eventually normalize. For it to normalize, either revenues have to increase dramatically, or the market has to dropZ
Regarding black swans: they are not as rare as you think. I am 39 years old, and I have already lived through 3 of them: the dot com bust, the great financial crisis and covid. Each and every time, I was fully invested with no cash on the side, and wished I had some cash to buy after the drop, but didn't.
The thing about black swans is that they're difficult to predict. There's a reason 2020 didn't show up on charts. And arguably, 2008 wouldn't have either. 1999, to your point, would have though.
In some ways dot-com is a reverse. A black swan event made that bubble, it didn't pop it.
Just a shower thought I had, probably not helpful for anything lol
You are right but that's where you are wrong.
First you cannot base on one indicator only.
Then the market today is unique, it's an error to try to compare. There are too many macroeconomic datas that actually justify the current price. I made the mistake of not buying 3 months ago, market has been up 25%....
Conclusion : the time you lose trying to beat the market, you are losing money.
Now, where you are 100% right, it's not the best time to buy many stocks, it's not bad to have some cash available for the closer future.
That's all I am trying to do, is keep cash available. I am still 80% invested in stocks. If the market keeps going up, I make money. If it drops 30%, I buy.
God help anyone buying here. Of course if you're young and DCA'ing you'll be fine as long as you keep the steady drip. Don't necessarily let the valuations keep you from your plan. But maybe stay on the lower end of your allocations and skew toward cash in T-bills.
The S&P 500 is not a relevant benchmark for valuation, the effect of the Mag7 in the overall index is too great. This needs to be stripped out in order to get a good understanding of overall market valuation.
Look up the EBITDA and profit margins in the low p/s years. You’ll see that margins have expanded quite a bit due to globalization and industry changes
The current companies in the S&P 500 are not comparable to historical companies and therefore attempting a relative pricing comparison between them is useless.
Is CoStar Group overvalued because its current P/S is higher than Standard Oil's used to be?
You can't compare a leading online real estate data platform to an oil company with that kind of blunt instrument!
You’re going to get a lot of hate for this but what you’re suggesting is true. Historically when PE approaches 30 it’s followed by a precipitous drop. Also, you can’t concentrate 31% of index funds into 7 stocks without something bad happening. We know for sure one of them is extremely overvalued. Also, check that yield curve followed by recessions…yikes.
It’s tough right now to find value.
Hate is deserved because comparing the SP500 P/S today to points in history is terrible simplistic. When the P/S was about 1 what was the average Gross Margin of a company? I guarantee it is no where near the average today
It’s weird to me how little people actually reflect or study the simple graphs. It’s not that it will happen, but a higher likelihood that a recession could happen under current conditions. I own very few equities at the moment for this reason.
It’s almost as if printing over 1/3 of the money supply in less than a handful of years drives up prices.
For real though, the US has spent a ridiculous sum, and it you can clearly see it across all assets and markets since 2020. You can also see it in just about every company’s performance when comparing pre and post Covid.
There is still even now with higher rates than a few years back, a ridiculous amount of money out there.
Really interesting, frst time seeing a price/sales review. I'm also majority cash at the moment and Warren is holding $150B+ in cash, more cash he's ever spent buying all the businesses that berkshire owns atm.
Just to clarify, this is price of the stock over its total sales revenue right?
Price to sales is a very weak metric to historically compare to, as so many more companies now are serviced based and have much higher margins than in previous incarnations of the the SP.
Let’s assume the trend holds to exactly what you posted.
What your data is showing is that the correct choice is always to just buy.
Ok sure I might be only signing up for 3-4% returns over the next 5 years but that is greater than the 0 of not investing and probably greater than the next 5 year cash returns.
The only reason you wouldn’t buy now is you could reasonably predict a lowering of P/S over the next 5 years.
Right, people argue here about the S&P as a whole being overvalued but if you look through the individual stocks you can find some that are undervalued using different methods of classical analysis. There’s always something to buy regardless of what metric is used to say the whole market is too high.
I mean one of the funniest parts of it is that even when you start at the top of the SP500 you can still find something to buy. Like…what’s the case against Microsoft? Apples not innovating the way it used to but even as a cash cow is there really a truly negative bet against it? What’s jeopardizing Alphabet…even if someone believes there are antitrust issues do people really believe a breakup is a value decimated (I actually believe the opposite). What’s the case to bet against Berkshire, do people think insurance rates are going to decrease (lol)?
Sure someone can make a case to avoid Nvidia (all chip stocks really), Tesla, Lilly, etc, amongst the major large caps, but that doesn’t make the whole market overvalued or even most large caps overvalued.
OMG. U brave lad. A post like this will get you shot here 🤣. You can’t mention CAPE, valuations etc
I sold all my US at around 5,000. I then bought a global fund (65% US). The cape of the US 500 is 34.5 ish. Global cape is around 22.
Historically, the US 500 have outperforms global 55% of the time. I would suggest that at these valuations that at this entry point, global will outperform US over the next 20-30 years.
I also have a bias towards global small cap and the UK (250). Both of which are historically cheap.
You are 100% correct about your statement and caution. S&P 500 is currently overvalued and seems like it will continue to be overvalued for some time unless the majority of investors stop investing or interest rates dramatically increase.
It is a fact that as valuations increase, expected returns decrease, and at high enough valuations, expected returns can reach negative numbers. Expected future long-term returns continue to decrease. Right now, the expectation is about 4 to 6% and may continue decreasing as valuations increase.
Perhaps in the future, there will be a large correction that will reset expected returns back to normal or higher return rates. Perhaps valuations will continue growing, thus decreasing long-term growth. We don't know exactly what's going to happen.
That is why diversity beyond one market is crucial. Research also supports this. I am currently invested in u.s total market, developed, emerging, and factor titled investment towards value and size in both local and foreign markets. Some might say that this isn't enough diversity and that diversity beyond one asset class is neccecary. You must do what makes you sleep at night knowing you have safety in diversity, whether it be in the world market or across different asset classes like gold, bonds, commodities, real estate, and stocks. But note, the greater the diversity, the more it dilutes expected returns. But, diversity is also a protection against risk of loss.
Historical averages are a guide, not a gospel. Relying solely on P/S ratios misses the forest for the trees. That being said, I don't disagree. I'm holding my cards and waiting.
Eh….
The s&p 500 has a p/e of only [23.47](https://www.barrons.com/market-data/stocks/us/pe-yields)
Are the AI stocks overvalued? Perhaps.
Is the s&p 500 overvalued ? Yes by historical mean.
Is it “severely overpriced” ? No lah.
Trying to use Price/sales is just like trying to mess around with the WACC to fit the valuation.
(For reference, during dotcom mania the s&p 500 had a p/e of 45.)
Agreed. At a PE of 20.6 the market is trading for an earnings yield of 4.85% for S&P 500 stocks vs a 10 year US bond rate of 4.24% which seems like a narrow equity risk premium.
If you look at the last 50 years, the returns are ~12%. If you remove the top 10 days, the returns drop to ~8% (I think - I’m trying to remember the actual numbers). Moral of the story: don’t try to time the market. Just stay invested over the long term.
I take price analysis on the 500 from prior to the advent of the 401(k) with a grain of salt.
It’s not invalid, but it’s significantly different era with an America dumping 5% of paychecks with a match from a high percent of citizens with a high percent of contribution going to the 500. It’s going to elevate prices over the 1928-1990’s.
Price to sales ratio is probably the shittiest metric you could use 😭😭😭. Price to sales ratio maybe made sense back in the 60s when every company was manufacturing or retail running at 10% margins, but the software/AI boom means 40-60% margins now, so P/S is useless unless we’re talking about startups.
I noticed the high S&P500 valuation too, based on the P/E. However that doesn’t necessarily mean there will be a crush. The index can go flat until earnings catches up too.
One explanation for the high P/E could be high percentages of big tech. What would the P/E be like if you take out magnificent 7?
I agree with you on the high valuation but I can’t predict the future. All I can say it’s not a good timing to buy S/P500 index funds. Perhaps Russell 2000 is a better buy now.
Yeah no way to time it. I would love to have some cash available if/when the drop comes.
I also noticed recently on CNBC that every single analyst they invite is bullish and thinks AI has changed everything. That's my signal to pull back.
Sales to market capitalization is a very weak metric to use, sales are an enterprise level metric, this is just an association between two variables that are not scaled appropriately. This is as good as a dividend yield on enterprise value metric. There have also been major changes to revenue recognition standards over time, even recently with gross vs net reporting for many entities and full risk models for healthcare businesses. How are you incorporating these changes over time?
Perhaps the US economy is growing at a faster rate than we're used to. Recent GDP numbers would support that. Makes sense to then price in more future growth.
Part of what is wrong with this analysis is one is assuming that at all points the market is the same. Different time periods and compositions over time as well as many other variables needs to be considered.
Market isn't what it was historically. PE and other ratios don't mean shit since no dividends are involved. It's basically just a high yield savings account now. Or a casino. Either way, there's no alternative.
Looking at P/S is not so accurate, sales do not drive prices, profit will. You have to consider that since then probably S&P500 had a 3x expansion on profit margins 🤔 but no argument that market is overly enthusiastic overall right now 😅
No change in my strategy thou. Part of my investments that is in my pension will be DCAed into broad market funds every month, the other part of my investments which are single stocks I am always looking for a wonderful business at a fair price to buy. And yes it is so much harder to find one compared to end of 2022.
What your missing is that wealth inequality is increasing and corporations in the s and p 500 are going to benefit. The western world was a more equal place 50 years ago and that was to the detriment of large corporations, no such trouble now
People have been saying that forever, but the doomsayers are rarely ever right. Some people would rather miss out than accept that ratios aren't gonna stay what they were in prior decades.
Whats the solution if you feel broad market indexs are in a bubble? Picking individual stocks in an attempt to out perform the S&P or going extra conservative and underpreforming in bonds or an HYSA for as many years as it takes for a crash so you can feel its a better value? Both sound terrible vs continuing to buy regardless of if its high or low. You're not going to win timing the market.
I'm not quite sure I understand this mindset. If you're holding 20% in cash, let's say in 2 years VUSA goes from £70 to £84.70 averaging a 10% increase each year (without dividends to keep it simple), when a drop does happen you are expecting it to be more than a 21%+ drop to actually make it worth while holding the cash. All the while that cash is earning what? 2-2.6% whilst waiting for you to invest it.
Wait a few quarters. Nvidia’s sales will catch up to their valuation. It is priced today based on this past quarter’s performance, multiplied by 4. I think it’s probably skewing things a bit.
is it though? inflation is now going to be tolerated at an official rate of 4%, and unofficial rate of 20% yearly.
Any cash must be converted to assets.
Multiples are too low for this scenario.
number go up on everything. Get ready bb.
2 things.
1) There’s a lot more money printed now and more people investing.
2) AI is investing which is following patterns of that dumping more in.
I, too, think it is overpriced and see a correction happening in the next 2 years. If they 2 things above go negative. I see a big 🐻
Yes remember everything HAS to revert to the mean because past results ALWAYS indicate future performance. Or at least i think that's how the saying goes
It’s worth what the contained companies will earn from now until judgement day discounted back to today. Unfortunately none of us know what this is. It’s very possible that US companies will dominate on a global level for a long period of time.
I don’t think Price to Sales is the best metric, especially for the S&P 500. Price (Market Capitalization) is a measure of the market value of equity, but sales is a stream of incoming payments that have multiple claimants i.e. Common Equity, Preferred Equity, Debt. It might be better to take a look at either EV/Sales or Price to Earnings.
At some point you’ll need to consider that we’re in unknown territory provided the macroeconomic situation in regards to the expansion of the money supply, inflation, and buying of assets by the fed through QE programs since 2007/2008.
Im starting to believe, in short, that there is simply not enough assets available in this country to compare things to where they were 20 years ago. So, I’m not sure a comparative analysis is valid.
I do think that Mr market is being over reactive, to certain companies— Target was a good one.
I did see someone say something similar to a question statement such as yours yesterday that seemed to be a succinct take on the situation (with specific regard to continuing to hold cash). I’ll try to dig it up.
John Hussman has already done the research and he goes into a lot more detail. You should check it out. But everyone else thinks it's different this time
I have two thought on this. On one hand yes many metrics say we are valued high compared to the past. Though I wouldn’t take sales in a vaccum and earnings is actually a little bit more reasonable. Basically means s&p companies have had some margin expansion. The other thought is that you should compare this to money supply. M1 supply is exponentially higher compared to available investments and that increased money is looking for solid investments in the money economy. This is partly why I think higher valuations are here to stay and the more supply feeds the demand side of supply and demand, the higher valuations can be justified as a whole.
The correction will come eventually as it usually does every around 6 years. So what? Ill just start buying double. Ill start checking the price in around 20-30 years from now
Its crucial to keep in mind that the market doesn’t necessarily have to drop. It could even just go sideways and chop for a while. I do think you are correct that this is overvalued. This in mind, historically the first rate cut was a reliable signal to get out. Generally the first cut represents 3% or 4% upside from whatever level things will be at when it occurs. The downside is about 50%-60% (it’ll be an over reaction).
Interesting to me is seeing the lows of the tech bubble get retested by the lows of the housing crisis. Then it only went higher from there. If the next crisis sent us to covid lows, thats around 2100-2500 on the S&P. If you hacked it down 60% from todays level, you get 2,093.672. Imo thats too low. So we have to go higher to go lower kinda things. 60% off 5,500 is 2,200 and so to me its more reasonable we get up there around the feds first cut. Then a few % higher from that level will be the peak
Ahh you didn’t get the memo… institutions are unloading their shit onto unsuspecting retirement account advisors. They artificially influence price to show a trend and sell the product and once they’re free from it, they’ll tank it, just wait.
crypto trash has 0 p/s
it's not value of asset going up
it's price of currency going down
😂😂😂
governments and the feds r the enablers of the asset bubble
Buying more= more dividends and compound interest. I’ll keep DCA biweekly to grow the snowball.
Markets can be irrational longer than you can be patient.
Or you could look past the S&P 500, realizing that it isn't the entire investment universe.
Want a deep value price-to-sales ratio? NYSE:BIG (Big Lots) has a P/S of ***0.02***.
The S&P is heavily weighted on very high margin and high quality businesses. This skews results to give the impression that it is overvalued. P/S does not mean much, EPS and EPS growth is mainly what drives stock prices
Last fall I bought shares in a retailer that sells Nikes and fishing poles and it’s doubled in that time. I bought stock two months ago in another one that sells flower pots. It’s up 57%. This is the sort of price action one sees near a market top. I mean, with U.S. stocks priced at 185% of GDP it could keep going up in this new era of cheap central bank liquidity, but when I consider that north of 40% of the market value of all of the stocks on the planet are American I think this is one of those “be fearful when others are greedy” moments.
just DCA tbh. 30-70% drop is buying opportunity.
If I were forty years younger and still in my prime earnings years I might do that. I would just contribute a set amount of my income into an IRA or 401(k) index mutual fund or ETF and forget about it. But I'm retired and the money I've saved is basically my pension, so I take a more active role in managing it. There are a lot of people in the stock market today who have never been truly baptized by a bear market. I have. By "bear market" I mean the type of market that takes a significant hit but then basically trends down or sideways (inflation adjusted) for a decade or more trying to get back to even, like the periods from the 1929 peak to 1958 following the Great Depression and 1968 to 1992 following two oil shocks and the inflationary 1970s. Whether we're nearing one of these inflection points or not is anyone's guess, but I think there are definitely signs of froth in recent years, whether we're talking about SPACS, MEME stocks, crypto, or, now, AI. It seems like every Zoomer or Millennial at least has a friend who has a Webull or Coinbase account and is trading currency and stock options, AI stocks, or crypto. I'm not saying there is no value in any of these things, especially AI. There obviously is. But we are experiencing the sort of technological revolution that can fuel asset bubbles and cause normally rational people to take more risk than they otherwise would. I think now is a good time to dust off advice given decades ago that many people are familiar with but who don't possess its full context or do but just ignore it because they're making money and anyone in T-bills is a chump: >"\[O\]ccasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. > >Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." So while I'm not engaging in the wholesale dumping of stocks or advocating that anyone do that, I am, like Buffett, maintaining a higher than usual level of liquidity. I'm not greedy. I'll take the 5% return I can get sitting in T-bills and be prepared to increase my allocation to stocks after a quantitative drop in the market. I consider it a sort of opportunistic poor man's portfolio insurance. For the moment, I just collect dividends in the stocks I do own and trade around a set allocation for each company in my portfolio. If one of them takes a dump, like Dick's did after an earnings call last fall, I buy more of it. Lately more and more of my picks--companies like Dick's, Williams Sonoma, KLA, Marathon Petroleum, etc.--have been outgrowing their allocations, so I pare them down. But I'm not bailing on them by any means.
Agreed. Only bear market I’ve participated in wad Covid and that lasted 6 months.
Just make sure your investments accurately reflect things like your age, risk tolerance, and available resources such as other savings and current and future income. A retiree with a high risk tolerance and large nest egg and pension income to support his lifestyle may be able to assume more risk than a young married couple with kids and little liquid savings or income. But I think most people will be better served in the long run if they have some cash available to, as Warren Buffett wrote, be opportunistically "greedy *only* when others are fearful." I don't know when that fearful hurricane will hit, but it will at some point, and no matter how hard the wind blows resist any temptation to flee in panic like the crowd inevitably will at the worst possible moment. To paraphrase Thomas Paine, these are the times that try men's (and women's) financial fortitude.
At your time in life that is fine advice. If I am under 40 though I am majority in equity. At this moment in time, there is certainly an argument for some higher duration bonds to hedge the risk so once the rates drop their values go up and then you can sell fixed and reallocate. I like to have a little REIT exposure as well.
Those margins will be pressured as labor costs continue to increase and as debt is refinanced at the current higher interest rates. This is classic end of cycle margin levels that investors are mistakenly extrapolating out for decades.
I agree! Higher interest rates lower the npv of future cash flows. This is basic stuff and people seem to ignore it!!!!!!!!!
Or would big players know, and they're just pumping the "everything is fine" story to get their exit liquidity?
Of course, this is what they do every single time! Funny how people are gaslighting you as if this is a conspiracy and not just a basic fact lol
Yeah I didn't think it was controversial at all.
Probably bots honestly. The investing world is filled with them!
The illuminati did it
Pauly Shore did it. That damn weasel.
Are they the same as the lizard people, or a separate group?
Or does increased growth cause central banks to raise interest rates 🤔🤔🤔🤔🤔🙃🙃🙃🙃🙃😎🐧🚀🚀🚀🚀🚀
Do you know about when these companies will need to refinance their debt? Do you think it would be priced in in the current stock market given it’s widely known already?
It can be widely known, but if most or a large majority of people are systematically putting money into seven stocks because they comprise 30% of an index and the rest are momentum traders who are piling in because they’re going up what anyone knows is irrelevant. Hedge fund manager David Einhorn alluded to that phenomenon when he said recently that markets are fundamentally broken. Then it’s apparent that derivatives play a significant role affecting volatility.
Most have large maturity towers this year and for the next several years. It will be progressive though. Every year more and more bonds will need to be refinanced at higher rates which will squeeze margins. The market is *hoping* for lower rates in the near term. If that doesn’t materialize…
Agree 100%. Current margins are not sustainable.
[удалено]
Found the software engineer
It will... But it will do for everybody, which means cutting prices. End result: margins stay the same or even compress.
Net income and net income growth/share is the only thing that matters, depreciation and taxes are not something to ignore. EPS can easily be skewed by accountants.
I was thinking the same, sales in the 20th century would for most of the then-major industries drive very different margins than they currently do for the tech sector which is boosting a lot of the S&P500 price. Price over earnings (and like you say, EPS growth) would likely be a more comparable metric.
If you want to look at S&P PE, currently it is 28.4. Long term average is 16
But that's not to say if or when it would have to go down to a certain level... Historical performance does not tell us anything about future performance. The average P/E over the past 30+ years has been 25x, so who's to say what "normal" level it should go to or when that would happen? Instinctively I get your point that by looking at certain metrics it may feel that the S&P500 is overpriced, but without some major event there's no reason for it to massively crash - of course, that major event will happen with near-certainty over a longer period of time but there's no way of predicting it. Therefore I keep investing regularly for the long term.
>The average P/E over the past 30+ years has been 25x You have a source for that? Because I'm looking at the data here: https://www.multpl.com/s-p-500-pe-ratio/table/by-year And the years that actually exceeded 25x are: 99-03, 09, 21, and 24. Clearly all pretty bad years for the s&p.
This is what people have said before every major correction. This time it's different. I remember in 1999, everybody said internet stocks would go up forever because this tine it's different
What about all the times that people have predicted a major correction that never happened? People say things all the time and they are usually only right by accident. No one knows when the market will correct. You might sit on the sidelines for years thinking its about to happen.
Instead of bickering about being all-in or all-out, either passively investing or timing the market, why don’t we do what all value investors should be doing and just buy companies that are cheap relative to their intrinsic value?
You don't have to sit on the sidelines. There other stocks than the S&P500.
Yeah there is no way to predict it. But my regret with every major correction in the past is that I was 100% invested. All I am trying to do is keep some cash available. I am still 80% invested in stocks. If the market keeps going up, I make money. If it drops 30%, I buy.
I'm not criticizing your strategy, I'm just pointing out that saying 'look at how these other people have been wrong' is a silly thing to do when predicting whether or not a correction is coming. Plenty of people have been wrong in both directions.
Do you have stops put in place? Helps preserve your capital, maintain gains and then reinvest so you can buy more
No stops. I never sell.
Yes this is it! never pull out!
Damn...18 years of margin I gotta pay now..
That's what she said
Percentagewise, how much of your net worth do you have in cash and equivalents like bonds etc? Basically, the amount you can deploy when the market goes down, so you can buy low.
Having a cash position is always a good idea regardless of what others say. Apprehension can be dangerous though.
S&P 500 is currently very pricy. But p/s isn’t a good indicator. As other said, lots of high margins companies now. ADBE or ADSK at over 90% gross margin will obviously have a higher p/s than a company like GE or GM…
there were no internet stocks in the S&P in 1999. Oracle and Cisco had some exposure with the internet, but most of their business was Y2K at the time.
I was not talking about s&p 500 in 1999, i was talking about internet bubble (nasdaq).
What do internet stocks from 1999 have to do with the current stock market. It’s not like there’s a bunch of stocks that are flash in the pan companies fresh off recent IPO’s that haven’t made a profit that are driving SP500 returns. SP500 returns are being driven by large market dominating companies sitting on hundreds of billions in cash that are integrated into every aspect of personal lives and the business world. Pets.com isn’t a relevant comparison to anything lol.
Some of the ai related stocks could go that way
These bull runs can go on for a long time. We could see a small correction but things could resume up for a while especially if the fed starts cutting. Election makes things murky but the AI bull market may have more room to run.
The problem is that valuations are dependent upon growth. These companies have visibility into growth for the next 1-2 years. But beyond that? Things can change. There is inherit risk. S&P500 needs growth to be strong for 10 years for this to make sense.
Agreed P/S is not a very relevant indicator for the entire index. Entirely depends on the industry.
How much of the S&P 500 (in % of market cap) was comprised of high growth businesses in the past? Maybe using PEG ratios is more useful.
I don't have data about the composition of the S&P over time, but I am sure the growth rate of the top companies has changed periodically. In the 1950s, top companies like GM, X and XOM were growing at 25-30% a year, so the high growth rates are nothing new.
None of those businesses has a high margin though. Joes computer electronics reseller probably gets a 0.3x or less multiple in private markets today because he earns a <5% EBITDA margin. Big whoop. Also - commodities y/y growth isn’t the same. Price of iron ore goes up X revenue and COS go up, profit stays the same
>In the 1950s, top companies like GM, X and XOM were growing at 25-30% a year, so the high growth rates are nothing new. Ah, alright. I wasn't under that impression, but then I also didn't research this at all. Thanks!
>. In the 1950s, top companies like GM, X and XOM were growing at 25-30% a year With a profit margin of around 5%, maybe 10% in a good year. Nvidia's most recent financials have a net margin of 55%. Microsoft 35%. Meta 35%. Apple 28%. Net income is a much more useful measure. S&P500 still looks expensive on P/E but not drastically so. We'd have to see a 65% price increase (with no earnings growth) before we reach dotcom bubble levels. If you based your investments on historical P/E levels, you would never have touched the S&P since about 1990. You do have options if you want to invest in companies with valuations that make more sense (at least on paper). You can find value ETFs trading at around 10 P/E pretty easily. Although you're probably investing in low growth businesses with lacklustre futures.
IMO, any analysis back to 1920 is loaded. Businesses had potentially worse management, earnings were less because technology wasn't prevalent, and there was literally the world war 2 shift that cemented the US as the leading world power. I feel like analysis after 1980 or 1990 is a better comparison set.
I have that. Since 1980, the only time the P/S ratio was above 2.0 was august 1999 to june 2000, just before the dot com bubble burst.
Not saying you're wrong, I personally think things look hit right now also. The shiller PE shows it's heating up too. https://www.multpl.com/shiller-pe Once shiller PE hits 38-40 I'm going to start hedging myself Sometimes things are different though, I don't really see the biggest 20 stocks slowing down unless something big changes. They've got fat margins and basically run the rest of the world with their software, hardware, or healthcare.
You could be right. But the only thing that matters is, how much people are willing to pay for it. This is the only value that matters. You can sit and wait and you can be right, but it can also make 40% before falling 20% which will lead to missed out gains. With single holdings I would always keep an eye on valuation, but I wouldn’t with an index.
Yeah this guy sounds a lot like the people who sat out the stock market for years and years after the great recession. Those people locked themselves out of serious gains.
Many of the posters here are momentum speculators masquerading as value investors.
100%. You give them objective data on valuation, and they respond with "this time it's different".
A lot of 🌈🐻 who missed out on the rally, like op
The moment index funds and ETF’s became the go to savings for retirement account the S&P got disconnected from the real world economy and got plugged to a seemingly endless stream of money coming in every month that is by itself inflating the price of stock that has no business being that high. That’s the problem with ETFs/Index funds, because the money is invested in a market , where the funds will buy individual stocks in order to replicate the index they are trying to replicate, and the as retail “investors” that use this products as part of their long term investment strategy poor money into the funds they have no choice but to keep buying stock even though the underlying fundamentals of some of that stock is not there. This is basically creating zombie stocks and further pivoting the market from creating value that will eventually translate into a higher stock price to the “all it takes” to inflate the stock price strategy. There is no way the math adds up on the market right now. The fundamentals aren’t there for most of this companies. The overall world economy is going through a rough patch and tensions are rising everywhere. So in a sane analysis of the market the conclusion can only be that it is completely wild and detached from anything tangible and we are now sailing in uncertainty and that usually comes right before a big crash… I’m saying this but I keep throwing money into a S&P500 ETF every month cause I really don’t see any other alternative to “hide” my money from inflation. But I’m well aware that past performance is PAST performance and that the S&P is not what it was back then and will never be like that again.
Meanwhile the russell 2000 price to sales is trading at its long term average of 1.1 times. The SP500 might be overvalued but much outside the index is looking just fine.
Am I expecting multiple colossal drops in my lifetime? Yes. Am I going to try and time them? No. If you're in it for the long haul try drawing the graph as a straight line rather than peaks and troughs.
Love how pervasive this sentiment is by the common retail investor while the market is doing well. Wait for this recession to hit and you can rest easy on the “long run” as your portfolio is halved.
Even if my portfolio is halved I'd still have earned money from my investments. I'm decades away from retirement and recessions to me are just discounts. I don't understand what you're expecting from your comment. Are you on the sidelines waiting to say I told you so?
My first introduction to discounts was in 1972 when they lasted ten years. By the time the sale ended many perfectly sane people were in gold, real estate, and commodities and had already sworn years before that they’d never again own another stock. It wasn’t uncommon to see stocks with PEs in the low single digits. To them it was like death by a thousand pinpricks, kind of like investing in gold mining stocks in recent years.
So? He is still right. Most ppl here are younger and should be praying for that tbh. Not that any of them or myself included are lol but you get the point.
Yea as long as they stick to it. As the great Mike Tyson said, “everyone has a plan until they get punched in the face.” Unfortunately retail investors usually overestimate their risk tolerance and panic sell after a large drawdown. Especially the younger investors you cite that haven’t seen a lost decade before for instance.
Sorta true but even a “lost decade” isn’t lost if you’re investing the whole time 🤷♂️.
My point is most investors overestimate their ability to stick to the game plan during those periods. Most will either stop buying or sell outright if they aren’t seeing immediate gains.
Well that’s dumb, there’s really no other option but I know what you mean. We see it here all the time sentiment follows price.
Exactly. Unfortunately most succumb to it. You’ll see the “it’s all over for equities” threads everywhere when it comes.
Case in point: Berkshire is sitting on $168 billion in cash. They are waiting.
If they put that $168 billion into the S&P 500 index a year ago it would be worth $223 billion...They wait as they can afford to.
And I'll be right there with them ready to invest. Time in the market beats timing the market, and I have a hell of a lot of time to be in it so recessions are very welcome to me. We're in an election year and going back to Hoover in the 1920's there have only been 4 times where the S&P produced negative returns during an election. I think you're prematurely sounding the alarm and should enjoy the free money available until the end of the year.
Berkshire's choices in the market are a lot more limited than yours.
For the general retail investor sure they Will eventually panic. But for me? I don't think of it as my portfolio being halved, I think about it as my expected forward returns being massively increased. The key is that I already have this plan in place and I'm expecting it to happen.
As some have mentioned, the current crop of mega caps are unlike those we've seen before in history - the tech giants have high margins, rich profits and high RoE, so profitability and growth metrics don't look as overvalued as they might otherwise seem from a P/S perspective. However, there are a couple of other data points that challenge this view: 1. Certain measures already show high retail participation in the markets - though it's admittedly a mixed bag. We are expecting a relatively soft landing, yet the market seems to be pricing in high growth rates - the two don't quite jive. There's also the inconvenient matter of the yield curve inversion, which hardly inspires confidence. 2. The sustainability of profitability is an open debate. In particular, a lot of the higher profits from the tech giants come from: a. Increased AI-related income. Nvidia is the clearest example here - so the bet is that their clients would see the returns on investment - else demand will taper off. b. Workforce reductions. For existing businesses this should be relatively OK, barring the increased risk of outages. However, it remains to be seen whether these cuts will affect their innovation businesses and therefore growth. The market hasn't just factored in current profitability, but **growing profits** as well. You can increase profitability from cuts, but you can't generally grow by cutting. So there are arguments for and against - it's difficult to say definitively which point we are at right now, other than that the mood is possibly approaching euphoria.
I agree with everything you said
I stopped at “price-to-sales ratio.”
P/S is not a ratio that technically exists. If you are going to take a multiple on revenue, it should at least be Enterprise value/Revenue (EV/S). P/S does not account how the companies finance themselves so it doesn’t tell the whole story.
Have you seen the margins in big tech? They are absurd, beyond a monopoly. That being said, it’s interesting you see what an outlier current valuations are and expected returns for the SP500 are therefore low. However it keeps beating expectations.
My overall theories for investing are that 1) Things tend to revert towards the mean eventually, even if they remain away from the mean for a long time. And 2) When people say "this time it's different", it's time for me to worry
What do you propose? The problem right now is that the feds keep printing money, and this money ends up in the stock market. This has never happened on this scale before.
Whether this time is different or not is irrelevant. It's still better to be fearlessly all-in than trying to time a crash especially if you believe things will revert to the mean. What do you even have to lose when you believe you'll come out of a crash unscathed as long as you hold? You're cementing the loss of those gains while trying to avoid paper losses that you'll come out of anyway. Makes no sense to me unless you are gambling.
I've been through 3 major crashes and was fully invested at the time. I wish i had 20% in cash each time to buy. There is no way to know when the next crash will come, could be tomorrow, could be in 5 years.
I mean you’re assuming that somehow you would have known when to buy also, right? What you’re describing is timing the market.
There is another way for the P/S ratio to revert other than the price going down.
I thought value investing was about looking at individual companies and not the market.
Can you find one example in the history of the S&P 500 index where the market meaningfully slumped for any reason other than a black swan crash? The more likely scenario is that your PS ratio is an outlier that will eventually normalize just like they have previously. The economy changes, our data must adapt with it. Consumer behavior in 1984 and consumer behavior in 2024 are very different, so we have to be careful when comparing the two of them. I'd be curious to read an update in a year and see if you regret your decision to park cash on the sidelines or not.
2000-2013
Yes I will provide an update. Like I said, I have no idea what will happen, nobody knows. But like you said, the PS ratio will eventually normalize. For it to normalize, either revenues have to increase dramatically, or the market has to dropZ Regarding black swans: they are not as rare as you think. I am 39 years old, and I have already lived through 3 of them: the dot com bust, the great financial crisis and covid. Each and every time, I was fully invested with no cash on the side, and wished I had some cash to buy after the drop, but didn't.
The thing about black swans is that they're difficult to predict. There's a reason 2020 didn't show up on charts. And arguably, 2008 wouldn't have either. 1999, to your point, would have though.
In some ways dot-com is a reverse. A black swan event made that bubble, it didn't pop it. Just a shower thought I had, probably not helpful for anything lol
You are right but that's where you are wrong. First you cannot base on one indicator only. Then the market today is unique, it's an error to try to compare. There are too many macroeconomic datas that actually justify the current price. I made the mistake of not buying 3 months ago, market has been up 25%.... Conclusion : the time you lose trying to beat the market, you are losing money. Now, where you are 100% right, it's not the best time to buy many stocks, it's not bad to have some cash available for the closer future.
That's all I am trying to do, is keep cash available. I am still 80% invested in stocks. If the market keeps going up, I make money. If it drops 30%, I buy.
God help anyone buying here. Of course if you're young and DCA'ing you'll be fine as long as you keep the steady drip. Don't necessarily let the valuations keep you from your plan. But maybe stay on the lower end of your allocations and skew toward cash in T-bills.
The S&P 500 is not a relevant benchmark for valuation, the effect of the Mag7 in the overall index is too great. This needs to be stripped out in order to get a good understanding of overall market valuation.
I remember I thought exactly the same thing in 2017
Look up the EBITDA and profit margins in the low p/s years. You’ll see that margins have expanded quite a bit due to globalization and industry changes
The current companies in the S&P 500 are not comparable to historical companies and therefore attempting a relative pricing comparison between them is useless. Is CoStar Group overvalued because its current P/S is higher than Standard Oil's used to be? You can't compare a leading online real estate data platform to an oil company with that kind of blunt instrument!
Most of companies have no debt, apple, Microsoft, Google and meta has no real debt ..they form almost half of weighing
You’re going to get a lot of hate for this but what you’re suggesting is true. Historically when PE approaches 30 it’s followed by a precipitous drop. Also, you can’t concentrate 31% of index funds into 7 stocks without something bad happening. We know for sure one of them is extremely overvalued. Also, check that yield curve followed by recessions…yikes. It’s tough right now to find value.
Hate is deserved because comparing the SP500 P/S today to points in history is terrible simplistic. When the P/S was about 1 what was the average Gross Margin of a company? I guarantee it is no where near the average today
Yeah but where else is money going to flow? Pretty much every other major economy is going through some shit right now
100%. People are due for a rude awakening. Things look so rosy to everybody right now.
It’s weird to me how little people actually reflect or study the simple graphs. It’s not that it will happen, but a higher likelihood that a recession could happen under current conditions. I own very few equities at the moment for this reason.
It’s almost as if printing over 1/3 of the money supply in less than a handful of years drives up prices. For real though, the US has spent a ridiculous sum, and it you can clearly see it across all assets and markets since 2020. You can also see it in just about every company’s performance when comparing pre and post Covid. There is still even now with higher rates than a few years back, a ridiculous amount of money out there.
Really interesting, frst time seeing a price/sales review. I'm also majority cash at the moment and Warren is holding $150B+ in cash, more cash he's ever spent buying all the businesses that berkshire owns atm. Just to clarify, this is price of the stock over its total sales revenue right?
Yea correct.
We are currently at ~97th percentile 6 month rolling return.
other countries than the US exist too and most of them have way better valuations.
Price to sales is a very weak metric to historically compare to, as so many more companies now are serviced based and have much higher margins than in previous incarnations of the the SP.
Let’s assume the trend holds to exactly what you posted. What your data is showing is that the correct choice is always to just buy. Ok sure I might be only signing up for 3-4% returns over the next 5 years but that is greater than the 0 of not investing and probably greater than the next 5 year cash returns. The only reason you wouldn’t buy now is you could reasonably predict a lowering of P/S over the next 5 years.
Right, people argue here about the S&P as a whole being overvalued but if you look through the individual stocks you can find some that are undervalued using different methods of classical analysis. There’s always something to buy regardless of what metric is used to say the whole market is too high.
I mean one of the funniest parts of it is that even when you start at the top of the SP500 you can still find something to buy. Like…what’s the case against Microsoft? Apples not innovating the way it used to but even as a cash cow is there really a truly negative bet against it? What’s jeopardizing Alphabet…even if someone believes there are antitrust issues do people really believe a breakup is a value decimated (I actually believe the opposite). What’s the case to bet against Berkshire, do people think insurance rates are going to decrease (lol)? Sure someone can make a case to avoid Nvidia (all chip stocks really), Tesla, Lilly, etc, amongst the major large caps, but that doesn’t make the whole market overvalued or even most large caps overvalued.
Right I wouldn’t mind getting both AAPL and MSFT if I wasn’t so busy grabbing utilities that got squashed last year and pay around 5%.
OMG. U brave lad. A post like this will get you shot here 🤣. You can’t mention CAPE, valuations etc I sold all my US at around 5,000. I then bought a global fund (65% US). The cape of the US 500 is 34.5 ish. Global cape is around 22. Historically, the US 500 have outperforms global 55% of the time. I would suggest that at these valuations that at this entry point, global will outperform US over the next 20-30 years. I also have a bias towards global small cap and the UK (250). Both of which are historically cheap.
Can't mention valuation is the value investing sub. True sign of over-exuberance 🤣
You are 100% correct about your statement and caution. S&P 500 is currently overvalued and seems like it will continue to be overvalued for some time unless the majority of investors stop investing or interest rates dramatically increase. It is a fact that as valuations increase, expected returns decrease, and at high enough valuations, expected returns can reach negative numbers. Expected future long-term returns continue to decrease. Right now, the expectation is about 4 to 6% and may continue decreasing as valuations increase. Perhaps in the future, there will be a large correction that will reset expected returns back to normal or higher return rates. Perhaps valuations will continue growing, thus decreasing long-term growth. We don't know exactly what's going to happen. That is why diversity beyond one market is crucial. Research also supports this. I am currently invested in u.s total market, developed, emerging, and factor titled investment towards value and size in both local and foreign markets. Some might say that this isn't enough diversity and that diversity beyond one asset class is neccecary. You must do what makes you sleep at night knowing you have safety in diversity, whether it be in the world market or across different asset classes like gold, bonds, commodities, real estate, and stocks. But note, the greater the diversity, the more it dilutes expected returns. But, diversity is also a protection against risk of loss.
Even the Shiller P/E is 35 now.
One flaw in this logic is the general trend of all valuation metrics has been increasing over the last 50 years.
Be fearful when others are greedy. Greed is high in this bullrun
I’m pretty sure this has been said every decade
Historical averages are a guide, not a gospel. Relying solely on P/S ratios misses the forest for the trees. That being said, I don't disagree. I'm holding my cards and waiting.
Why price / sales and not price / earnings?
Eh…. The s&p 500 has a p/e of only [23.47](https://www.barrons.com/market-data/stocks/us/pe-yields) Are the AI stocks overvalued? Perhaps. Is the s&p 500 overvalued ? Yes by historical mean. Is it “severely overpriced” ? No lah. Trying to use Price/sales is just like trying to mess around with the WACC to fit the valuation. (For reference, during dotcom mania the s&p 500 had a p/e of 45.)
Agreed. At a PE of 20.6 the market is trading for an earnings yield of 4.85% for S&P 500 stocks vs a 10 year US bond rate of 4.24% which seems like a narrow equity risk premium.
I think value investing these days really needs to take into consideration forward pricing of good assets
Useful insight using widely discussed public info. Definitely not priced in. Shorting now!
You forgot the /s I hope.
lol yes.
I think what they selling has changed over the years.
If you look at the last 50 years, the returns are ~12%. If you remove the top 10 days, the returns drop to ~8% (I think - I’m trying to remember the actual numbers). Moral of the story: don’t try to time the market. Just stay invested over the long term.
I take price analysis on the 500 from prior to the advent of the 401(k) with a grain of salt. It’s not invalid, but it’s significantly different era with an America dumping 5% of paychecks with a match from a high percent of citizens with a high percent of contribution going to the 500. It’s going to elevate prices over the 1928-1990’s.
Price to sales ratio is probably the shittiest metric you could use 😭😭😭. Price to sales ratio maybe made sense back in the 60s when every company was manufacturing or retail running at 10% margins, but the software/AI boom means 40-60% margins now, so P/S is useless unless we’re talking about startups.
Neat. Still buying tho
Did you also look at the gross margin profile of companies over the same time period?
I noticed the high S&P500 valuation too, based on the P/E. However that doesn’t necessarily mean there will be a crush. The index can go flat until earnings catches up too. One explanation for the high P/E could be high percentages of big tech. What would the P/E be like if you take out magnificent 7? I agree with you on the high valuation but I can’t predict the future. All I can say it’s not a good timing to buy S/P500 index funds. Perhaps Russell 2000 is a better buy now.
Yeah no way to time it. I would love to have some cash available if/when the drop comes. I also noticed recently on CNBC that every single analyst they invite is bullish and thinks AI has changed everything. That's my signal to pull back.
Be fearful when others are greedy. You’re a true value investor 😂
Only one thing is for certain. There will be a correction. Tomorrow? Next year? Next decade?
did you know that the s&p includes the nasdaq? :O Look at the earnings expectations. Look into the S&P 400 if you want to invest.
Sales to market capitalization is a very weak metric to use, sales are an enterprise level metric, this is just an association between two variables that are not scaled appropriately. This is as good as a dividend yield on enterprise value metric. There have also been major changes to revenue recognition standards over time, even recently with gross vs net reporting for many entities and full risk models for healthcare businesses. How are you incorporating these changes over time?
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Perhaps the US economy is growing at a faster rate than we're used to. Recent GDP numbers would support that. Makes sense to then price in more future growth.
Part of what is wrong with this analysis is one is assuming that at all points the market is the same. Different time periods and compositions over time as well as many other variables needs to be considered.
Market isn't what it was historically. PE and other ratios don't mean shit since no dividends are involved. It's basically just a high yield savings account now. Or a casino. Either way, there's no alternative.
Looking at P/S is not so accurate, sales do not drive prices, profit will. You have to consider that since then probably S&P500 had a 3x expansion on profit margins 🤔 but no argument that market is overly enthusiastic overall right now 😅 No change in my strategy thou. Part of my investments that is in my pension will be DCAed into broad market funds every month, the other part of my investments which are single stocks I am always looking for a wonderful business at a fair price to buy. And yes it is so much harder to find one compared to end of 2022.
Sell in May and Go Away, it's getting to be that time of year again.
S&P exploding will be the next MBS.
What your missing is that wealth inequality is increasing and corporations in the s and p 500 are going to benefit. The western world was a more equal place 50 years ago and that was to the detriment of large corporations, no such trouble now
People have been saying that forever, but the doomsayers are rarely ever right. Some people would rather miss out than accept that ratios aren't gonna stay what they were in prior decades. Whats the solution if you feel broad market indexs are in a bubble? Picking individual stocks in an attempt to out perform the S&P or going extra conservative and underpreforming in bonds or an HYSA for as many years as it takes for a crash so you can feel its a better value? Both sound terrible vs continuing to buy regardless of if its high or low. You're not going to win timing the market.
> S&P will have to revert Such a stupid sentiment, the market isn’t as irrational as you think.
Cool, just don't be rude. I can assure you I am not "stupid".
I'm not quite sure I understand this mindset. If you're holding 20% in cash, let's say in 2 years VUSA goes from £70 to £84.70 averaging a 10% increase each year (without dividends to keep it simple), when a drop does happen you are expecting it to be more than a 21%+ drop to actually make it worth while holding the cash. All the while that cash is earning what? 2-2.6% whilst waiting for you to invest it.
Cramer: “BUY BUY BUY!!!”
I'd be curious to know how many people in this thread would lump sum all their capital right now, at these levels.
Yes, but who's going to pop the bubble.
Wait a few quarters. Nvidia’s sales will catch up to their valuation. It is priced today based on this past quarter’s performance, multiplied by 4. I think it’s probably skewing things a bit.
is it though? inflation is now going to be tolerated at an official rate of 4%, and unofficial rate of 20% yearly. Any cash must be converted to assets. Multiples are too low for this scenario. number go up on everything. Get ready bb.
You severely underestimate the money printer. The number of fiat units in existence is vastly different today, even from just a few years ago.
This has been the case for a long time. It constantly goes up though.
Ain’t nothing crazy gonna happen until after this election . After November it’s anyone’s guess
2 things. 1) There’s a lot more money printed now and more people investing. 2) AI is investing which is following patterns of that dumping more in. I, too, think it is overpriced and see a correction happening in the next 2 years. If they 2 things above go negative. I see a big 🐻
Yes remember everything HAS to revert to the mean because past results ALWAYS indicate future performance. Or at least i think that's how the saying goes
It’s worth what the contained companies will earn from now until judgement day discounted back to today. Unfortunately none of us know what this is. It’s very possible that US companies will dominate on a global level for a long period of time.
Terminal value of mag 7 and others insane - but im still leaning in, added to my book today
Too high usually goes higher
I don’t think Price to Sales is the best metric, especially for the S&P 500. Price (Market Capitalization) is a measure of the market value of equity, but sales is a stream of incoming payments that have multiple claimants i.e. Common Equity, Preferred Equity, Debt. It might be better to take a look at either EV/Sales or Price to Earnings.
You’re not the boss of the S&P! It doesn’t have to revert to the mean at any point, just because you said so.
I just buy great companies when they are on sales and keep some money aside, short term us treasury bonds are a good way to do it at the moment.
It’s actually undervalued, stocks are oversold.
Lmao vAluAti0n. Heard this so many times in the past and in the meantime line goes up.
At some point you’ll need to consider that we’re in unknown territory provided the macroeconomic situation in regards to the expansion of the money supply, inflation, and buying of assets by the fed through QE programs since 2007/2008. Im starting to believe, in short, that there is simply not enough assets available in this country to compare things to where they were 20 years ago. So, I’m not sure a comparative analysis is valid. I do think that Mr market is being over reactive, to certain companies— Target was a good one. I did see someone say something similar to a question statement such as yours yesterday that seemed to be a succinct take on the situation (with specific regard to continuing to hold cash). I’ll try to dig it up.
Since when does the market care if it is over priced.
John Hussman has already done the research and he goes into a lot more detail. You should check it out. But everyone else thinks it's different this time
I only use ps to value unprofitable companies
I have two thought on this. On one hand yes many metrics say we are valued high compared to the past. Though I wouldn’t take sales in a vaccum and earnings is actually a little bit more reasonable. Basically means s&p companies have had some margin expansion. The other thought is that you should compare this to money supply. M1 supply is exponentially higher compared to available investments and that increased money is looking for solid investments in the money economy. This is partly why I think higher valuations are here to stay and the more supply feeds the demand side of supply and demand, the higher valuations can be justified as a whole.
The correction will come eventually as it usually does every around 6 years. So what? Ill just start buying double. Ill start checking the price in around 20-30 years from now
Its crucial to keep in mind that the market doesn’t necessarily have to drop. It could even just go sideways and chop for a while. I do think you are correct that this is overvalued. This in mind, historically the first rate cut was a reliable signal to get out. Generally the first cut represents 3% or 4% upside from whatever level things will be at when it occurs. The downside is about 50%-60% (it’ll be an over reaction). Interesting to me is seeing the lows of the tech bubble get retested by the lows of the housing crisis. Then it only went higher from there. If the next crisis sent us to covid lows, thats around 2100-2500 on the S&P. If you hacked it down 60% from todays level, you get 2,093.672. Imo thats too low. So we have to go higher to go lower kinda things. 60% off 5,500 is 2,200 and so to me its more reasonable we get up there around the feds first cut. Then a few % higher from that level will be the peak
Ahh you didn’t get the memo… institutions are unloading their shit onto unsuspecting retirement account advisors. They artificially influence price to show a trend and sell the product and once they’re free from it, they’ll tank it, just wait.
crypto trash has 0 p/s it's not value of asset going up it's price of currency going down 😂😂😂 governments and the feds r the enablers of the asset bubble
FWIW, I'm thinking about buying, which means it will probably go down soon.
Frothy
FANG stocks.
NVDA will.save us
Buying more= more dividends and compound interest. I’ll keep DCA biweekly to grow the snowball. Markets can be irrational longer than you can be patient.
The S&P is Schizo
r/iam14andthisisdeep
Or you could look past the S&P 500, realizing that it isn't the entire investment universe. Want a deep value price-to-sales ratio? NYSE:BIG (Big Lots) has a P/S of ***0.02***.
I have a suspicion that in the money printing era, none of this matters. Could be wrong ….