The S&P 500 Is Now Overvalued On 18 Of 20 Metrics

With the market now stuck in the "Icarus Rally" melt-up predicted earlier in the year by BofA Michael Hartnett, in which EFTs, algos and desperate carbon-based hedge fund managers are all chasing performance, i.e. beta, in the last weeks of the year, at least until the inevitable "Humpty Dumpty great fall", some have been naive enough to ask just how overvalued are stocks as of this moment.

Yesterday we showed one answer, when according to Goldman Sachs, the average stock is in the 88th percentile of all historical valuations and 98% from if one uses median stocks to eliminate huge outliers such as Apple;  the number would be even higher if one excluded cash flow-based valuation metrics, which are artificially boosted due to the collapse in capex and investment spending. 

In any event, it is safe to say that stocks have never been more expensive.

Today, we present a different response, this time from Bank of America, which has just completed the periodic update of its valuation matrix based on the 20 most widely used valuation metrics, and which finds that as of today, the S&P is substantially overvalued on 18 of 20 valuation metrics, with the only exceptions being free cash flow (helped again by depressed capex), and relative to small caps/bonds - the Fed's favorite indicator -  where yields remain depressed thanks to the Fed's failure to stimulate wage inflation for nearly 9 years.

Some brief observations from BofA: the S&P 500 forward P/expanded to 17.7x in October - its highest level in 13½ years — as the market rallied more than estimates climbed. The valuation backdrop for the S&P 500 remains the same: US stocks trade above historical average levels across nearly all metrics, but equities continue to look attractive relative to bonds, where the equity risk premium (ERP) is more than 50% above its long-term average. Multiples expanded across most sectors last month: the energy sector continues to trade at a record discount to history on relative Price/Book, but grew increasingly expensive on relative forward P/E as analysts revised down EPS estimates amid the continued weakness in oil prices.

Finally, for those curious how today's tech bubble compares to that from 2000, here is a hand breakdown.


balz Wed, 10/18/2017 - 15:00 Permalink

Mindset changed. Some years ago everyone believed the market would crash, and it went up. Now, everyone believes the Fed has our back...

Rapunzal Solosides Wed, 10/18/2017 - 15:36 Permalink

Following ZH since its inception, I follow all the major trends. QE 1-3 etc. I left the stock market in 2015 in October. I felt it's up to the central banks, when they will pull the plug. I always did my portfolio based on risk management. I'm not even sad I left the market, it really is the musical chair gamble. I sleep better not being in the race.
We will see when they will pull the plug. In any case terrible times will follow.

In reply to by Solosides

onthedeschutes Wed, 10/18/2017 - 15:04 Permalink

"the S&P is substantially overvalued on 18 of 20 valuation metrics" Cool...then the central bankers have two remaining metrics to spin why everything is just dandy with current valuations.

IDESofMARCH Wed, 10/18/2017 - 15:46 Permalink

Who Cares about Value?  Who cares what it does.Just buy (even dogs have going up) and sell to the next guy for more. Just don't look down or you'll get sick.Just be greedy and look straight up cause there's no down below.

abgary1 Wed, 10/18/2017 - 16:02 Permalink

Valuations and risk are meaningless thanks to the central banks.It's all about the flows and yield.There is just too much fiat money floating around.

Hal n back Wed, 10/18/2017 - 18:01 Permalink

How ironinc only cash flow is ok and thats becase companies have unused capacity so no reason to expand. Thats the capex thing BAC discusses.Back a zillion years ago in college we were taught that when a growth company generates cash its no longer a growth company.