This time’s different. (Narrator: It’s not.)
A couple of days ago, someone sent me a mail (or maybe mentioned it in a comment, I can’t remember which) about a BofA note suggesting we might’ve entered a “new normal” when it comes to valuations for US equities, and particularly for US blue-chips.
That note — a September 24 update — isn’t the first time Savita Subramanian suggested as much. She has the bank’s SPX house call, and she’s said something similar about an ostensible new era for valuations on multiple occasions over the last two or three years.
Although her colleague Michael Hartnett hasn’t exactly endorsed the view (his unofficial job at the bank is to play-act a snarky skeptic, or at least that’s how his weeklies have always read to me), he’s repeatedly delineated between what he calls a “20th century” multiple for the index, and a “21st century” multiple, always leaving the underlying question (i.e., Does the 21st century multiple in fact a constitute a “new normal”?) unanswered.
When it comes to top-down, sell-side research, Subramanian’s about as good as it gets. Those of you familiar with my opinion of sell-side strategy notes will identify that as a back-handed compliment, and you won’t be wrong. But it’s not meant to be disparaging. Subramanian’s trenchant, she can write, she doesn’t come across as automatonic on television and with allowances for the fact that (preemptive apologies to everyone this might offend) investing based on top-down sell-side strategist calls is completely asinine, she’ll generally keep you on the right side of the market. Or as much as any weatherperson can.
I say all of that to say this: It’s never different this time, in any context, but if you’re going to entertain someone suggesting it is, you could do worse than Subramanian. Her take, in a nutshell, is that this S&P (today’s S&P) is a different animal entirely than yesteryear’s index, and should be evaluated as such.
The table below, from Subramanian’s September 24 note, tells you what you already know — namely that the cap-weighted benchmark is expensive on every classic metric you care to consult, and expensive as hell on most of them.
“The S&P 500 is statistically expensive on 19 of 20 metrics and has never been more expensive on market cap-to-GDP, P/BV, P/OCF and EV/Sales,” Subramanian wrote.
But that’s ok (narrator: It’s really not) because according to Subramanian, “historical averages may not be comparable to today’s index.”
Some of you might be familiar with her argument, and to reiterate: As far as “this time’s different” arguments go, it’s decent. Corporate America simply isn’t as risky as it used to be, and if you want the “safety and predictability” that goes along with owning a slice of it (a slice of corporate America) you gotta pay up.
“Today’s S&P 500 sports a lower debt-to-equity ratio than prior decades, outlays are more predictable given an eradication of floating-rate debt by [constituents], earnings volatility has decreased, the [index] has grown more asset-light and more labor-light and processes are cheap, scalable and replicable,” Subramanian said, adding that “the next leg of efficiency gains” will come from AI and de-regulation.
Subramanian has charts which illustrate each and every one of her arguments. I’ve included two of those charts above.
The figure on the right’s especially important in my view because it speaks to the larger debate about private-to-public risk transfer. Allow me a quick aside on that.
There was a time, believe it or not, when it was considered a good idea to de-risk the private sector by shifting an enormous amount of leverage to the public balance sheet. 17 years on from the GFC, there are two obvious problems with that strategy. First, public sector leverage is now so high that even people who don’t normally fret over such things are concerned, particularly given a lack of political will to address the “problem.” Second, the public debt is, ultimately, still an obligation of households. It’s public debt. So, even if transfer payments funded by government bond issuance give people breathing room to, for example, pay down credit cards, the “same” people (not literally, but the same body politic) still owe the money.
Segueing quickly back to the “new normal” discussion vis-à-vis the S&P, corporates are also on the hook for the public debt incurred by the government in their respective locales, but they have myriad ways of mitigating and reducing their exposure in that regard, virtually none of which are available to the average household. They can lobby for corporate tax cuts, they can avail themselves of creative accounting and loopholes and they can simply raise prices to consumers in order to generate more revenue.
So, it’s not entirely far-fetched to suggest the largest US companies are a safer bet than the US government, especially in 2025. That bet’s reflected in near record tights for IG corporate credit spreads. Blue-chip supply hit a September record this month north of $200 billion against a backdrop of sub-80bps high-grade spreads, suggesting little (read: nothing) in the way of concern over quality.
Even if you’re not buying the notion that the S&P 500 “has changed significantly from the 80s, 90s and 2000s” and therefore it makes sense to “anchor to today’s multiples as the new normal rather than expecting mean reversion to a bygone era,” to quote Subramanian describing her thesis, untenably high valuations needn’t “resolve” through price declines.
“An earnings boom could fix the valuation problem,” Subramanian went on, and with “the Fed cutting against a backdrop of broadening and accelerating profits, it’s not hard to argue” for such a boom scenario, both in EPS and GDP growth.
Apropos, BofA lifted their 2025 index EPS estimate to $271 earlier this month and introduced a $298 forecast for 2026. That’d be 12% growth this year and 10% next. In that note, Subramanian also ventured an “early take” on 2027 aggregate index earnings, “pencil[ing] in 7% growth to $320 with bust to boom scenarios ranging from $255-$340.” (If it’s $340, and we assume a “new normal” forward multiple of 23x, that suggests the S&P will trade up to 7800 midway through next year as traders look ahead.)
The subtitle of Subramanian’s September 24 note (the note that garnered the media coverage) reads as follows: “The S&P 500 trades like it’s the new risk-free rate.” Chuckle as you might, but you gotta admit, “risk-free” probably isn’t the best description of US federal government promises and pledges in 2025.
