Are Stocks Cheap?

Tyler Durden's picture


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...


Chart: Bloomberg

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Fri, 01/10/2014 - 22:18 | 4321656 HedgeAccordingly
HedgeAccordingly's picture

bullard knows - at least in arears -

Sat, 01/11/2014 - 01:12 | 4322077 markmotive
markmotive's picture


Christine Hughes (Otterwood Capital Management) 2014 Outlook

Sat, 01/11/2014 - 04:56 | 4322275 Popo
Popo's picture

So we trust Goldman when it's a negative outlook, but we don't trust Goldman when they're bullish?  


We must assume -- hell, at this point we *know* -- Goldman has a direct line to the Fed Chairman's office.   (There's probably a big red phone marked "Lloyd" on Yellen's desk already).   And for all we know, Yellen has already phoned in her intention to back off this silly "taper" business (just "for now", of course) and Goldman is doing it's best to send the wrong signals to the market.

Given that we really have no clue as to what's going on when Goldman opens its collective mouth, and given that the history of Goldman's projections tends to have little to do with reality -- why do we care at all?   And more importantly, why does ZH promote their guidance?  (And flip back and forth on whether or not it's trustworthy?)

Sat, 01/11/2014 - 09:07 | 4322422 Popo
Popo's picture

Well, when it's "taper off" again, which one of us will be the sucker? You're apparently betting on the taper. Good luck with that.

Sat, 01/11/2014 - 12:00 | 4322631 666
666's picture

Stocks are very cheap as long as QEternity is in effect.

Sat, 01/11/2014 - 17:50 | 4323451 A is A
A is A's picture

Who the hell is we? ZH isn't promoting anything. Why don't you take a good look at the content they have provided and the analysis that they made and determine for yourself whether it is legitimate or not? Anyone who blindly believes what ZH posts is a fool anyway. I personally really like when they post this stuff. There is a lot of time and effort that goes into some of this data that these banks and other places put together. Is there conclusion from it questionable??? Sure, but I will draw my own conclusions...

Sat, 01/11/2014 - 13:05 | 4322810 Silver Bug
Silver Bug's picture

If hyperinflation kicks in, then yes, everything is cheap!

Fri, 01/10/2014 - 22:19 | 4321657 halfawake
halfawake's picture

quit w/ the pre-QE P/E rules and crap, they no longer count, btfath. zimbabwe.

Fri, 01/10/2014 - 22:37 | 4321698 TheRideNeverEnds
TheRideNeverEnds's picture

exactly this, if you like selling them when the P/E is 16 you are gonna LOVE selling them when the P/E is 20+

Sat, 01/11/2014 - 03:28 | 4322108 grid-b-gone
grid-b-gone's picture

A similar argument was made as NASDAQ approached 5,000 over a decade ago.

The internet, B-to-B, demographics, new paradigms ... there are always reasons to buy near the top, as there are always reasons not to buy at the bottom. Just look at any 40-yr view of an index (about an average lifetime investing span). Where do you wish you had bought? Where do you wish you had sold? Where are we probably now, given that longer-term perspective?

If excuses to buy this rising market are your thing, add this one to the list. If the Delphi and City of Detroit templates continue, earnings expectations are understated and projected tax shortfalls are overstated. We may be in the century of broken promises, wiping out long-term corporate obligations, giving post-boomer generations the break they thought they'd never get, and allowing earnings to catch up with multiples.

If 16 cents on the dollar (Detroit) ends up being the template for future obligations, and the typical 8% plan assumption doesn't return soon, earnings are overstated, meaning today's historically high P/E ratios are even higher due to underfunded pension and benefit obligations that have not yet forced their way to "E". 

Sat, 01/11/2014 - 11:59 | 4322629 Papasmurf
Papasmurf's picture

I heard this sort of "it's different this time" talk in 1999 just before TSHTF in internet stocks.

Fri, 01/10/2014 - 22:22 | 4321663 DoChenRollingBearing
DoChenRollingBearing's picture

Physical gold is cheap.  Get it while it still is.  5% (minimum) of anyone's assets (who has money put aside) should be in gold.

Fri, 01/10/2014 - 22:35 | 4321693 Soul Glow
Soul Glow's picture

Know we have just begun to watch the last leg of gold's journey in this economic system.  The next journey will prove your FOFOA correct.

Fri, 01/10/2014 - 22:39 | 4321706 DoChenRollingBearing
DoChenRollingBearing's picture



+ 1

Predicting the future is hard.  Nothing is for certain.  

But, gold is the best bet in town for diversification.

Fri, 01/10/2014 - 22:24 | 4321676 GotNuttin'todo
GotNuttin'todo's picture

Cheap... Cheap.... Chickens beware!  Better have big balls to play this end game!

Fri, 01/10/2014 - 22:32 | 4321687 frankTHE COIN
frankTHE COIN's picture

If by chance you 1) position your trades right and 2) Time the end right,
You will be part of one of the greatest trades in history.

Fri, 01/10/2014 - 22:34 | 4321691 Soul Glow
Soul Glow's picture

Considering the inflation stocks were cheap from 6k up until 15k.  Stocks became overbought at 16k.  Thus why a 20% drop has started.  Japan has already turned their swords over.  The periphory of Europe has enjoyed 2014 but this is a last ditch effort from London and Paris and Brussels to syphon the last bit out of the tank.

Watch as the most honest stock market - the Cac - falls like a rock from here.  And by most honest it is a shutty contest but the Cac corrected in '07 before any other major market.

US stocks will bob and weave through January but they will end the month lower.  They will be battling not only the dollar but gold.  As bond bulls and dollar bulls begin to win the argument that stocks are overvalued the rest of the world will look to gold to maintain their wealth.

Fri, 01/10/2014 - 22:37 | 4321701 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1 for gold.

You mean, *gasp*, there are still bond bulls left?!

Fri, 01/10/2014 - 22:40 | 4321709 Soul Glow
Soul Glow's picture

I've been most worried about the dollar over the last five years, but tens of trillions of dollars later the Fed is still buying tens of billions of bonds per month.  And now, now they can't keep the rates down.  The Treasury is likely sweating bullets right now.  If the Private Dealers don't show up?  If the Indirect Bidders fail to buy?


Sat, 01/11/2014 - 00:36 | 4322007 max2205
max2205's picture

I thought china's SSEC was the most honest...near 2009 lows.....

Fri, 01/10/2014 - 22:52 | 4321737 Cabreado
Cabreado's picture

"Even Goldman Sachs is starting to question the sanity of its clients hopes and dreams..."

Ah, but GS et al are paid, and have been paid, to head such things off at the pass.

The one thing to notice about this article, and how We work now, is that even GS is given a pass...

as we all fall down.

Don't miss the dynamics on the way there...

Fri, 01/10/2014 - 22:57 | 4321754 OC Sure
OC Sure's picture

Relative to negative interest rates? Yes, stocks are cheap.  When long rates come down, the yield gap between stocks and bonds will drive the parabolic rise higher. Look at that massive W from 2000 to 2007 on the S&P. W formations are quite reliable. This is a Bull Up pattern; the heaviest volume is on the right dip AND the right dip undercuts the left. It is a typical count and probably where the most bullish jawflappers get their 2,200 count on the S&P. The melt up probably has many more gasps, oohs and ahhs to come. Most importantly, where is the ringing bell? Remember the 2000 top when the AOL/Time Warner merger hit all 3 NUTs (Newsweek, US News, and Time magazines) in the same week of the top? Shouldn't we look for that sweeping zeitgeist that pulls the last sucker in for the final sign of the ultimate top?

Fri, 01/10/2014 - 22:55 | 4321755 Tinky
Tinky's picture

When compared with Bitcoin? Possibly.

Fri, 01/10/2014 - 23:04 | 4321783 Spungo
Spungo's picture

I have the pair trade of a life time. Short the VIX to buy Twitter.

Fri, 01/10/2014 - 23:08 | 4321792 mumbo_jumbo
mumbo_jumbo's picture

LOL, the gold bulls crack me up....i'm not saying you're wrong but.....

Fri, 01/10/2014 - 23:47 | 4321891 Spungo
Spungo's picture

My gold ETF is up almost 8% since buying it less than a month ago. I would say gold is working out nicely.

Sat, 01/11/2014 - 08:21 | 4322380 D-2
D-2's picture

Timing is everything, Bub. My gold ETF is down nearly 50 %.

Sat, 01/11/2014 - 00:15 | 4321962 yogibear
yogibear's picture

Zimbabwe economics brought to you by the US Federal Reserve.

Sat, 01/11/2014 - 00:35 | 4322005 CarrierWave
CarrierWave's picture

I have a feeling that this article will be adjusted and posted again when the SP500 is at 1900 , then again at 2000, etc.

So? - With all due respect to the many ZH's Doom and Gloom articles..

 -- Don't fight the FED. Stay with the Trend. Manage your positions intelligently. Use Stop Loss wisely and proper entry points.

Sat, 01/11/2014 - 11:58 | 4322626 jcaz
jcaz's picture

Without doubt, the most mindless post ever....  

So,  you're telling us not to think, and think?  Wow, Yoda-  you are using the Force so wisely.....

Sat, 01/11/2014 - 13:26 | 4322864 LooseLee
LooseLee's picture

"-- Don't fight the FED"....well said by a PINKO COMMIE

Sat, 01/11/2014 - 00:43 | 4322026 gwar5
gwar5's picture

They are priceless if you are the FED.


Sat, 01/11/2014 - 00:53 | 4322043 Stinko da Munk
Stinko da Munk's picture

2 and 20 is the only fundamental that counts bitchez.

Sat, 01/11/2014 - 01:19 | 4322091 QE49er
QE49er's picture

Please read my new book when it comes out, it's called

"Dow 100,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000

Sat, 01/11/2014 - 01:37 | 4322117 q99x2
q99x2's picture

The question: "Are Stocks Cheap" is invalid. It is similar to asking what is at the edge of the Universe. Fraud does not equate to valuation.

Sat, 01/11/2014 - 02:25 | 4322169 starman
starman's picture

Any of you fools believe that the market is to make another 5-10% advance got a big surprise coming! Wake u,p every asset is inflated grossly!

Sat, 01/11/2014 - 02:55 | 4322205 ACasey
ACasey's picture

ZeroHedge brings reality home.  There is good followup on Greg Hunter's USAWatchdog interview with Former Treasury Secretary Paul Craig Roberts.  "Gold Wars" by Kelly Mitchell will bring this story home also.  Catherine Austin Fitts' Solari Report is another good second on this story.

Market manipulation by the Federal Reserve accounts for 70% of stock purchases.  With 0% money lent to major banks, the major banks are laying low like great white sharks building massive short positions waiting to take everybodys money right off the game board. 

Market manipulation is so pervasive now no one ever imagined the shinanigans the Federal Reserve, regulators, and banks are getting away with. No one can figure out what new scheme is next because the manipulation is so entrenched in money, commodity, and stock markets.

It was interesting that Facebook, Netflix, and others  showed tremendous stock price gains but have not made any profit and are not building anything or making any jobs.  Chasing prices up comes with a fierce downside. 

If you want to gamble, go to a casino.  Physical possession of assets, get out of paper markets, and recognizing the consequences of debt based fiat currency like the US dollar are paramount to surviving economic loss.



Sat, 01/11/2014 - 05:59 | 4322318 disabledvet
disabledvet's picture

"of course stocks are cheap. That doesn't mean I'm buying. And it doesn't mean I'm not a seller either." Pretty much every investor...1929.

Sat, 01/11/2014 - 09:28 | 4322449 Agstacker
Agstacker's picture

I'm reading this, the similiarities to today are quite revealing-

Sat, 01/11/2014 - 06:09 | 4322324 DOGGONE
DOGGONE's picture

The real price truth
OMITTED, because it is too instructive!

Sat, 01/11/2014 - 07:57 | 4322372 sbenard
sbenard's picture

So now, even Goldman recognizes that stock valuations are "lofty". Isn't that a synonym for "bubbly"?

But in typical "speak out of two sides of your mouth" fashion, they also declare that stocks "trade close to fair value".

They have tacitly admitted that continued valuation at these levels depends on earnings EXPANSION, not current P/E valuations. They are admitting that prices at these levels aren't justified by current profit levels.

And yet, despite an awful jobs report, the S&P 500 closed HIGHER Friday! Investors are convinced that stocks were worth more on Friday, than they were worth just one day earlier! That is proof of market distortion, not market valuation!

So which is it, Goldman?

Sat, 01/11/2014 - 08:26 | 4322384 Sufiy
Sufiy's picture

The right question will be: Which stocks are cheap now? Those that nobody loves any more. Gold and Silver miners are the most hated. Nobody knows for sure, but what if these Jobs numbers are the real state of the economy?

Peter Schiff: Gold & Dollar - An Imaginary Recovery Does Not Create Real Jobs

Huge miss in Jobs numbers with only 74k created vs estimated well north of 200k can not be just dismissed as a blip in the data. Peter Schiff discusses that FED can not really Taper now, there is no real recovery and FED does not have the exit strategy. Gold is waking up to these developments. What if this data is the real state of the economy? Once people will realise how wrong is the expectation about the recovery Gold will go straight up. COMEX data shows that Gold shorts will be in trouble very soon.   Junior miners are finding the bids these days. McEwen Mining and TNR Gold had a very good week and huge short position on McEwen Mining will be driving the price in case if Gold will confirm its break out next week. Gold Breakout: COMEX Gold Warehouse Registered Gold Inventory at 93 to 1 GLD, MUX, TNR.v, GDX

Sat, 01/11/2014 - 09:44 | 4322465 madbraz
madbraz's picture

The P/E is 19 right now. Reported GAAP earnings.

Sat, 01/11/2014 - 11:56 | 4322624 q99x2
q99x2's picture

But we do know that Bitcoin is cheap because it's true value is upwards of a million dollars per Bitcoin.

So buy Bitcoin not stocks.

Sat, 01/11/2014 - 12:56 | 4322776 moneybots
moneybots's picture

"Are Stocks Cheap?


I was driving yesterday and flipping through radio stations, when i came upon the middle of a news bite interview in which the interviewee, talkng about 2014, said that stocks were cheap.

Sat, 01/11/2014 - 13:01 | 4322795 moneybots
moneybots's picture

"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."


Based on history. 

Based on history, The market doesn't belong up where it is.  What is the fair value, once all the still ongoing financial fraud is removed?

Sat, 01/11/2014 - 13:04 | 4322804 moneybots
moneybots's picture

"Even Goldman Sachs is starting to question the sanity of its clients hopes and dreams..."


I question the sanity of anyone who would want to be a Goldman Muppet.

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