If you, like me, have argued that stocks probably won’t rise much further because investors can’t possibly be so goddamn stupid that they’ll continue to throw money at a market that, to quote Goldman from a few weeks ago, “now trades at the 90th percentile of historical valuation relative to the past 40 years,” you’ve lost an argument (or nine).
Stocks have indeed continued to rise (well, up until this week anyway), as the rally off the 2011 debt ceiling lows continues to be driven almost solely by multiple expansion.
And while there’s no way to know if this week marked a turning point in investor optimism as outflows suddenly accelerated, with US equities seeing the biggest exodus since Brexit (based on EPFR data), it’s worth beating the dead valuation horse a bit more on the off chance recent outflows suggest someone is listening. With that in mind, I would ask: “how comfortable are you with this?”…
Strip away the tech bubble and what do you get?
Well, if that makes you uncomfortable, consider that in the context of corporate profitability, stocks have only traded this rich on a P/B basis one other time in history. Here’s Goldman:
The price/book (P/B) valuation of the S&P 500 is at the upper end of its historical distribution relative to current profitability. S&P 500 ROE between 14% and 15% has typically corresponded with a P/B ratio between 1.2x and 2.8x, versus 3.0x currently (see Exhibit 4).