Peak EPS
What If The Valuation Message Turns Out To Be Really Wrong?
Today’s Peak P/E ratio implies the S&P 500’s ten-year-forward annualized total return will be in the range of -3%. If this P/E ratio turns out to be as deceptively pessimistic as it was at its worst point in history, the S&P 500 could produce an annualized nominal total return of about +5% over the next decade.
Peak Earnings Yield A Rock-Bottom Forecast
At today’s 30.8x, the Peak P/E stands in the 99th percentile on all time horizons except the “New Era” (1995-to-date). Yet, that’s still five “handles” below the 35.8x all-time high recorded in December 1999. If that figure is matched, the S&P 500 will top 5,000.
A “Low-Risk” BUY?!?
So what do we make of July’s “low-risk” VLT BUY signal on the DJIA—the index on which the indicator’s creator (Sedge Coppock) did his original work? Sadly, not much.
Low Single Digits?
We encourage diversity of thought in our shop, but even pessimists among our ranks have a hard time making the case for a ten-year negative return for U.S. stocks, which was recently predicted by the founder of a large hedge fund.
“Peaking” Into The Future
Peak P/E has just moved into its top decile on a postwar basis. If the recent rally is indeed the first roar of a new bull, then this is a bull that’s a “baby” on a calendar basis, but quite elderly from a “character” perspective.
Pricing In “Peak” EPS
A recent theme in our valuation work is that we no longer need to assume a full-blown “reversion to the mean” to illustrate current U.S. stock market risks: Even a reversion to “old” bull market highs in ratios like S&P 500 Price/Sales, Price/Cash Flow, and Normalized P/E would result in bear-sized losses.