Click to enlarge
Merrill Lynch’s quant team looked at 15 metrics* that measure equity valuation (above).
Stocks are not overvalued; indeed, by most metrics, they are fairly valued.
Key bullet points:
• S&P 500 has been playing catch up to other indices;
• 14 of 15 measures say S&P 500 is fair to undervalued;
• Only the Shiller P/E suggests stocks are expensive;
• Four rotations underway are underway (that imply where best values might be found);
One worthwhile thing to add: I have been warning certain emailers/pundits/bears who seem to look at the Shiller P/E — and ONLY the Shiller P/E — that they are engaging in some confirmation bias in their metric selection process.
I cannot say that stocks are cheap here, but they also are not wildly overvalued. What happens going forward will depend on earnings — will they rise as the economy achieves escape velocity? Will they fall 30% as the economy tips into a recession.
The answer to these questions are here.
What is the Cyclically Adjusted S&P500 P/E Ratio ? (February 26th, 2010)
Why Using P/E Ratios Can Be Misleading (March 21st, 2012)
Meb Faber: Buy Cheap Cyclically Adjusted P/E (CAPE) (September 4th, 2012)
Stocks: Cheap or Expensive?
Savita Subramanian, Dan Suzuki, Alex Makedon, & Jill Carey
Bank of America Merrill Lynch, August 9, 2013
* There are additional some asterisks and caveats:
The Trailing P/E is based on GAAP EPS from 1960-1977, there have been many changes to the rules of GAAP accounting over the years.
Normalized EPS versus risk-free rate of return of treasuries is (obviously) skewed by ZIRP/QE.