Are Stocks Cheap?
We have asked (and answered) this question a number of times in recent weeks. Ignoring for a moment the bubble-trajectory, hope-expectations, and investor sentiment, as ex-Morgan Stanley-ite Gerard Minack notes, equity markets in 2013 appeared to completely ignore macro fundamentals. For 2014, as we warned here, the dream of moar multiple expansion may be over. With the Fed desperate to convince the world that strong language is just as effective as 100s of billions of dollars in liquidity provision, we suspect the 'wedge' between hope and reality will compress (significantly)...
Even Goldman Sachs is starting to question the sanity of its clients hopes and dreams...
S&P 500 valuation is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x).
We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion.
However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x.
We conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history.
This won't end well...
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