Are US equity valuations really the highest since 1999?
It depends on how you measure it. US stocks may not be as pricey as some say, but it’s hard to be enthusiastic about them when you can buy Korea at just 8-times forward earnings
Paul Tudor Jones was in the news this morning warning that equity valuations were the highest since 1999 as measured by the ratio of equity prices to GDP. In fact, the ratio of the comprehensive Wilshire 5000 Index to nominal GDP is almost back to where it was at the peak of the bubble in 1999.
That’s not the only measure of equity valuation, to be sure. The forward-looking P/E of the S&P 500 is around 18 on the Bloomberg bottom-up estimate vs a long-term average of 16, and well below the 1999 bubble peak of 27. On a forward-looking P/E basis, US stocks look pricey but not crazy.
Of course, some point out that half the expected earnings growth in the S&P is supposed to come from energy and financials, which may not do as well as expected if the oil price dips and interest rates remain low.
Asia Unhedged observes that the world looks very different now than it did in 1999. Back in 1999 the 10-year “real” Treasury yield (the yield on TIPS) stood above 4%, which implies a very strong long-term growth rate in the US economy. That corresponded to the last peak in the Wilshire/GDP ratio (in the upper right quadrant of the chart above).
Today real interest rates are around zero, which corresponds to the present peak in the Wilshire/GDP ratio.
Back in 1999, people bought stocks in the belief that the glorious future of the Internet would compensate for negative cash flow and high burn rates. Today people buy stocks because bond yields are miserably low. That’s not comforting, just different. It’s hard to get enthusiastic about US stocks at these prices, not when you can buy Korea at just 8 times forward earnings.