Think the current S&P forward PE multiple of 18.1x (which has been higher in the history of the market on only 1% of all observations), and especially when factoring for AAPL which has become the largest contributor to S&P earnings growth on the back of essentially one product, is too high? Unable to find any value in a market which trades where it does only thanks to $13 trillion in central bank liquid "generosity"? Don't be concerned, because Goldman has a trade idea for you. Sell the S&P 500 and instead go "deep value" by buying... the Nasdaq.
From Goldman's David Kostin:
S&P 500 trades at a high valuation relative to history. The typical stock in the S&P 500 trades at 18.1x forward earnings, ranking at the 99th percentile of historical valuation since 1976. At the index level, the aggregate S&P 500 forward P/E equals 17.4x and also falls at an extreme point on the historical valuation distribution based on data from the past 40 years.
Note that the high P/E multiple is assigned to earnings that reflect the highest profit margins in history. Margins for S&P 500 (ex-Financials and Utilities) have hovered just below the current 9.1% level since 2011. We forecast margins will stay at this level in 2015 and creep higher to 9.2% in 2016 while consensus forecasts margins of 9.4% in 2015 and 10.4% in 2016. Each 50 bp translates into $5/share in S&P 500 EPS or about 85 index points.
Ok, we get it: the S&P is overvalued and set for a correction. So what should muppets clients do? Why buy some of that Nasdaq exposure which Goldman was happy to accumulate on the way to 5000, and now would much rather generously share it with traders. Because nothing screams "value" like Nasdaq at 5,000.
Value is scarce in the current US equity market. NDX offers investors growth in addition to value. NDX comprises the 100 largest stocks in the Nasdaq composite index and has climbed to a level not seen since the early 2000s. Although price is reminiscent of the tech bubble, valuation of NDX tells a different story.
NDX trades at 18.8x forward earnings and a near decade-low relative P/E of 1.1x versus S&P 500. NDX relative P/E has been below 1.1x S&P 500 just 3% of the time since 2000. NDX beat S&P 500 during the subsequent 12- month period 100% of the time with an average outperformance of 957 bp.
While relative valuation stands near decade-lows, growth prospects are much better for NDX and are near an all-time high relative to S&P 500. Consensus expects NDX EPS will grow by 15% during the next 12 months, compared with just 5% expected EPS growth for S&P 500. During the last 15 years the spread between forward EPS growth rates of the two indices has averaged +3.5pp ranging from -26pp to +14pp. At 10.6 pp, the gap between the forward EPS growth rates ranks in the 93rd percentile since 2000.
The current wide spread between forward EPS growth rates implies NDX will outperform S&P 500 during the next year. The difference in consensus EPS growth has been greater than 10 percentage points only 13% of the time since 2000. NDX beat S&P 500 during the subsequent 12-months 75% of the time, with an average outperformance of 400 bp.
And when the value opportunities in the Nasdaq are exhausted, and when AAPL trades with a $1 trillion market cap because in 5 years everyone will have 5 iPhones at the same time, and when Biotechs plateau at 100x P/E when 8 billion humans fall sick with Hepatitis C, there is always the pink sheets for an even deeper value dive...
