Valuation with Emotion
The S&P PE is very high, but the catalyst which normally makes such a high PE multiple alarming - evidence of a vulnerable economy due to aggressive and exuberant private sector players - is absent.
Here in December, as Wall Street looks to 2026 when investment analysts, strategists, and pundits traditionally make New Year guesses, I’m surprised that “excessively high valuations” have not been mentioned more frequently. For bearish forecasters, it’s typically the first and most defensible reason for investors to be cautious. Perhaps my perception is in error but considering we are entering the 4th year of this bull run – one where the S&P 500 has already appreciated by about 90% -- touting the dangers of a stock market floating near record high valuations seem far less prevalent compared to traditional norms.
It may be because the stock market has been hovering at absurdly high valuations for so long that such warnings are increasingly falling on deaf ears. Since 2020, the S&P 500 trailing price-earnings (PE) multiple has been above its rolling 30-year monthly average 76% of the time. Indeed, it has been trading above its 30-year 75th percentile PE level nearly 60% of the time! And the current S&P PE of about 25.5x is higher than 88% of the time compared to the last 30 years! Although valuations still get mentioned today, they are often down the list of concerns after an AI crash, a renewed inflation problem, a recession, surging government debt, or ongoing political turmoil.
The contrarian in me is bothered by today’s seeming lack of respect for “the boy who called valuation risk”. I’m worried that when most finally give up on “value danger”, the stock market could be headed for a valuation adjustment. It’s not like BusinessWeek, Barrons, or the Wall Street Journal just ran a cover story entitled “Ignore Valuations”, but the general lack of Wall Street savants pounding the table about valuation risk during this “forecasting season” is a bit worrisome.
In this missive, however, I propose a different wrinkle to the valuation conundrum.
