How Expensive Is The S&P 500?

Multiples are stretched.

But you knew that, right? Everyone buying at these levels either has a whole lot of confidence in the Trump-inspired reflation trade or else is just buying because it seems like the thing to do now that the Dow looks destined to “break on through to the other side” of 20K.

“So you say multiples are stretched, aye? How stretched?”

Well, forward P/Es in the US and Europe are somewhere in the neighborhood of 1 standard deviation expensive:

(Chart: Goldman)

In the US, that’s assuming S&P 500 2017 EPS of something like $130. When you think about that number, consider that in order to get there, we’ll likely need to rely on a combination of buybacks funded by repatriated cash, lower taxes and some pro forma magic. Have a look at the breakdown according to Goldman:

(Chart: Goldman)

So remember, that 17.6 multiple you see in the first chart is based on adjusted EPS, plus assumptions about tax policy, plus estimates of how much repatriated cash is ultimately spent on buybacks.

That isn’t really anything new or surprising, it’s just something to keep in mind when you think about the fact that 17.6 is already one standard deviation expensive relative to history.