The Lost Decade: The Alarming Truth About The S&P's Current Valuation

Summary

The video script discusses the current optimism in the stock market, focusing on the S&P 500's price-to-earnings ratio and its historical context. It highlights insights from JP Morgan's market report, including the forward earnings per share estimates and the concentration of the S&P 500 in top 10 stocks. The script also explores consumer health indicators, inflation trends, and the potential impact of AI and data centers on electricity demand. It concludes with an analysis of international markets, suggesting value in non-US and small to mid-cap stocks, and advises investors to temper expectations for future returns due to current market valuations.

Takeaways

• 📈 The S&P 500 is trading near all-time highs, with investors showing increased optimism in the stock market despite higher interest rates compared to the past peak in 2022.
• 📊 JP Morgan's market reports provide a fundamental overview and pricing insights, helping to set expectations and identify potential value areas in the market.
• 💼 Wiky Stock offers a multi-dimensional scoring system for brokerages, focusing on regulatory aspects, business licenses, and risks, aiding investors in identifying reliable firms and reducing decision-making costs.
• 📉 The forward price-to-earnings (P/E) ratio of the S&P 500 indicates the market may be more expensive today than during the tech bubble, considering the higher interest rates.
• 📚 Historical data shows that the S&P 500's P/E ratio is currently above its 30-year average, suggesting that the market appears expensive relative to historical norms.
• 📈 Analysts expect significant earnings per share (EPS) growth for the S&P 500 over the next three years, pricing in substantial market growth which may or may not be realized.
• 💡 Value stocks, though cheaper than growth stocks, are still trading above their historical average P/E ratios, indicating that even value stocks may be considered expensive today.
• 🔝 The top 10 stocks in the S&P 500 are trading significantly above their historical average P/E ratios, contributing to the overall market's high valuation.
• 🌐 The S&P 500 is becoming increasingly concentrated in the top 10 stocks, reducing diversification and setting a record high concentration over the past 30 years.
• 💰 A small group of stocks, referred to as the 'Magnificent 7', have contributed disproportionately to the S&P 500's total returns, making it challenging for stock pickers to outperform the index without owning these stocks.
• 🏠 Shelter inflation remains the primary driver of headline CPI inflation, but it has been trending downward, suggesting a potential easing of overall inflation pressures.

Q & A

What is the current forward price-to-earnings ratio of the S&P 500?

As of July 31st, the forward price-to-earnings ratio of the S&P 500 was sitting at 20.7.

How does the current S&P 500 valuation compare to its historical average?

The current S&P 500 forward price-to-earnings ratio of 20.7 is above its 30-year average of 16.73, indicating that the market is currently trading at a premium relative to its historical average.

What was the forward price-to-earnings ratio during the tech bubble?

During the tech bubble, the S&P 500's forward price-to-earnings ratio reached 25.2, which was significantly higher than the current ratio and the historical average.

What is the projected earnings per share (EPS) growth for the S&P 500 over the next few years?

Analysts are expecting the EPS of the S&P 500 to grow by about 11% in 2024, and by 15% in both 2025 and 2026.

How does the current valuation of value stocks compare to their historical average?

Although value stocks are cheaper than growth stocks, they are still trading at a forward price-to-earnings ratio of 16.2, which is about 10% above their historical average of 14.1.

What is the significance of the 'Magnificent 7' stocks in the S&P 500?

The 'Magnificent 7' stocks have contributed to 51% of the S&P 500's total returns year-to-date, indicating that a significant portion of the market's performance is concentrated in just seven stocks.

How is the concentration of the S&P 500 changing over time?

The S&P 500 has become increasingly concentrated in the top 10 stocks, which now make up 35.7% of the index, a record high over the past 30 years.

What is the current household Debt Service ratio in the United States?

The household Debt Service ratio is currently at 10%, which is below the long-term average and significantly lower than its peak of 13.3% in the fourth quarter of 2007.

What is the projected growth in global electricity demand from data centers and crypto between 2022 and 2026?

The global electricity demand from data centers and crypto is projected to grow by 80% from 2022 to 2026.

How does the current valuation of Chinese stocks compare to other global markets?

Chinese stocks are currently trading at a price-to-earnings ratio of 9.3, which offers an earnings yield of around 11% and is significantly lower than the US markets, suggesting that Chinese stocks may be undervalued.

What does the data suggest about the potential for future returns in the stock market given current valuations?

The data suggests that investors should lower their expectations for future returns due to the current high valuations in the stock market, with the S&P 500's forward price-to-earnings ratio historically correlating with lower annual returns as it increases.