Shiller PE nearing second highest value ever

[Dtail]

Man, market goes down a few percentage points and like clockwork people start talking about PEs and the CAPE.
You know that Shiller himself is adamant that the CAPE is not a timing tool right? it's ONE variable. Why people even still bring it up is very strange.

For what its worth , here's a quote from 2017:
"
In 2017, the
Shiller P/E ratio was very high, consistently remaining above 30, a level nearly double its long-term historical average of around 17. This placed the market valuation at levels previously seen only before the 1929 crash and the dot-com bubble. "

Now imagine you stayed out of the market the last 9 years because you based your strategy on the "Shiller PE Ratio"!!!

As a conversation piece, not so bad.
As a timing piece, not so good.
I have mentioned many times in this forum that the Cape 10 has worked much better in the past, but not really very good since it was developed.
Mar 2009 for an exception to some extent.

 

[GravitySucks]

Yes. Now superimpose the 10 year bond yield...

Wonder if the popularity of stock buy backs broke the CAPE?

 

[audreyh1]

Wonder if the popularity of stock buy backs broke the CAPE?

IMO that definitely had an impact as did the related shrinking stock dividends.

 

[Montecfo]

Wonder if the popularity of stock buy backs broke the CAPE?

Broke it how?
Sorry perhaps I am being dense. But in what way was it once useful?

 

[Dtail]

Broke it how?
Sorry perhaps I am being dense. But in what way was it once useful?

When it was developed and truly believed in by some of the masses. However now.......

 

[audreyh1]

Well there is a very marked difference in the graph pre and post 2000. Some things about how equity markets work massively changed.

 

[Gallaher]

But this time is different. Maybe
a lot of AI investment is from companies that are well capitalized and using reserve funds to invest in the technology. Established companies like Meta, Google
With the dotcom bust we had rampant speculation and investment in companies that hadn’t made a dime.
I don’t know, maybe the AI boom is a bit more stable.

 

[audreyh1]

That’s what makes the current CAPE10 a bit freaky. In 1999 it shot up because there were so many new companies with negative earnings pushing up the ratio due to low E. Now these big “AI” companies are reasonably capitalized, so negative earnings are not the problem, it just stock prices P being pushed so high by themselves.

 

[Masquernom]

And the famous quote "The market can stay irrational longer than you can stay solvent,"

 

[Montecfo]

That’s what makes the current CAPE10 a bit freaky. In 1999 it shot up because there were so many new companies with negative earnings pushing up the ratio due to low E. Now these big “AI” companies are reasonably capitalized, so negative earnings are not the problem, it just stock prices P being pushed so high by themselves.

I think you are into something, that being the components of the S&P. They change over time and the aggregate representation of different industries within it changes with the economy.

The CAPE10 is tied to trailing earnings. When earnings are rising rapidly, as is the case now, it will spike. Stocks trade on expectations, not as much on trailing earnings.

This is by way of explanation. I am not saying stocks are not "expensive". Just that comparability of the CAPE10 to prior periods may not be straightforward depending on the circumstances at the time.

 

[surprising]

I think you are into something, that being the components of the S&P. They change over time and the aggregate representation of different industries within it changes with the economy.

The CAPE10 is tied to trailing earnings. When earnings are rising rapidly, as is the case now, it will spike. Stocks trade on expectations, not as much on trailing earnings.

This is by way of explanation. I am not saying stocks are not "expensive". Just that comparability of the CAPE10 to prior periods may not be straightforward depending on the circumstances at the time.

Stocks of reasonably well run companies today, especially high tech and AI related, are stupid expensive. These are companies making lots of money, have valid real earnings, so the E is not low, which could artificially raise PE.

AMD - firing on all cylinders, selling everything they make, has a current trailing PE of 106. This is after the recent 20% haircut.
ARM - also firing on all cylinders, PE is 168. Also after a 20% haircut.
NVDA - PE of 44. Most reasonable high growth PE.
WMT- PE of 37. Head scratcher. Not sure how a low-cost retailer commands such a high PE.
COST- PE of 49. Double head scratcher. How does a low margin retailer command a higher PE than NVDA which just netted over $30B in a single quarter?

NVDA has the most appropriate PE for it's high growth. AMD and ARM are ridiculously expensive, even for their growth targets. The fact that the Walmarts and Costcos of the world have such high PE make zero sense to me.

 

[audreyh1]

Apparently Walmart and Costco are considered "All Weather Stocks" or safe havens in face of weakening economies so there is a flight to safety going on there.

 

[GrayHare]

Though PE is calculated as price/earnings, a stock's current price reflects the Street's estimate of future earnings. So, NVDA's PE being lower than other chip makers could reflect that the Street thinks NVDA's future earnings will not increase as much as that of the other makers.

 

[pjigar]

As a conversation piece, not so bad.
As a timing piece, not so good.
I have mentioned many times in this forum that the Cape 10 has worked much better in the past, but not really very good since it was developed.
Mar 2009 for an exception to some extent.

I have a theory that all these "broken" metrics are because of the financial engineering we (as the world) started doing after 2008 crash, specifically "Quantitative Easing". This tool was never used before 2008.

QE is essentially an artificial demand for securities created out of the thin air. We don't know what will be the long-term consequences of such financial engineering.

 

[audreyh1]

I have a theory that all these "broken" metrics are because of the financial engineering we (as the world) started doing after 2008 crash, specifically "Quantitative Easing". This tool was never used before 2008.

QE is essentially an artificial demand for securities created out of the thin air. We don't know what will be the long-term consequences of such financial engineering.

Companies were happily doing financial engineering well before 2008. GE 1990s+ (pre-breakup) is a good example, not to mention the outright fraud like Enron and WorldCom. I think a big valuation change happened as the investing public was gradually convinced that stock buybacks were superior to paying out dividends. It completely changed the way people looked at stocks. Instead of investing for a reliable and steady dividend stream, people invested mostly for capital appreciation. In Dec 1999 the S&P500 dividend yield dropped to 1.17%, the lowest ever. Few tech companies paid dividends back then although most larger tech companies introduced dividends later in the 2000s. Still they were much lower overall than they had traditionally been well before 2000.

FWIW not surprisingly with such high valuations, the S&P dividend yield is getting very close to that nadir again. (1.18%)

I think the main result of Quantitative Easing was to keep bond yields lower for an extended period. And maintain a healthier market for bonds during the 2008 aftermath huge credit crisis. This extended low interest rate environment definitely helped company stock prices.

 

[Al18]

Most SP500 companies have been reporting both GAAP and non-GAAP earnings for many years. The non-GAAP earnings are not true, in my opinion.

 

[pjigar]

Companies were happily doing financial engineering well before 2008. GE 1990s+ (pre-breakup) is a good example, not to mention the outright fraud like Enron and WorldCom. I think a big valuation change happened as the investing public was gradually convinced that stock buybacks were superior to paying out dividends. It completely changed the way people looked at stocks. Instead of investing for a reliable and steady dividend stream, people invested mostly for capital appreciation. In Dec 1999 the S&P500 dividend yield dropped to 1.17%, the lowest ever. Few tech companies paid dividends back then although most larger tech companies introduced dividends later in the 2000s. Still they were much lower overall than they had traditionally been well before 2000.

FWIW not surprisingly with such high valuations, the S&P dividend yield is getting very close to that nadir again. (1.18%)

I think the main result of Quantitative Easing was to keep bond yields lower for an extended period. And maintain a healthier market for bonds during the 2008 aftermath huge credit crisis. This extended low interest rate environment definitely helped company stock prices.

Companies always do what they can but when Feds do it then the scale and reach are significantly larger.