After the October correction, one recurring narrative that has emerged is that investors should jump into the pool because valuations have dropped low enough to make stocks attractive. But is that true?
According to Bank of America, while the forward P/E did fall 7.6% to 15.4x, while earnings estimates improved slightly following the worst monthly S&P 500 return since Sept. 2011 (-6.9% price return in October), the S&P 500 now trades largely in-line with the historical average P/E of 15.3x, and the ratio is now 15% below its November 2017 peak of 18.3x, where earnings estimates
improved 21% over that period. That said, all of this assumes no revenue declines and margin compression in the coming years, which as Goldman explained yesterday, is now an extremely risky assumption with margin growth peaking and just a few basis points away from contraction... and recession.
Meanwhile, even with the sell-off, stocks still look expensive versus history, particularly on backward-looking metrics (trailing estimates, P/BV, Shiller PE, etc.). In fact, as the following BofA table shows, stocks remain rich on 16 out of 20 metrics, and as has been the case for much of the past decade, are inexpensive only in terms of growth, free cash flow, and relative to bonds, although even these margins are now rapidly shrinking.
The table below is simple: it shows overvalued metrics in red, and undervalued in green. So much for he market being cheap relatively to history.