Investors Feel Almost No Risk Of Long-Term US Stock Market Downside

In a poll of my followers on LinkedIn and Twitter, I asked, “What US S&P500 average annual return do you expect over the next 10 years?” At the most extremes, 18% expected greater than 10%, while only 7% said less than zero percent. The majority said from 5-10%. In fact, most people see strong positive returns going forward.

But EV/EBITDA at 17.2x is way above average

The current trailing US EV/EBITDA at 17.2x is very high compared to its 10x average since 1990. This gives most value investors pause, but momentum investors are following this trend. Any investor who believes in the concept of reversion to the mean will be terrified by how clearly overvalued the US is.

The market hasn’t touched the Shiller CAPE 2000 peak

Robert Shiller’s cyclically adjusted PE ratio (CAPE) is now approaching 35x. It was only higher when it hit 42x during the dot com bubble in 2000. Consider that in 2000 US government long-term bonds were yielding about 5%, versus the current 1.5%. From this chart, you can see that the US market has been in a long bull run since the 1979 interest rate peak.

A fundamental investor knows that the value of a stock is largely dependent on the discount rate, which depends on the US bond rates. The current long-term US government bond rate of 1.5% is clearly supporting share prices. Suppose it was to reverse that it would spell the end of this current market peak. Based on this chart, a fundamental investor would say that the US market is now significantly overvalued.

Though expensive, we are not in uncharted territory

We calculated the US stock market EV/EBITDA for each month from 1990 to today. We then broke those into ten deciles from cheapest month to most expensive. After that, we asked, “How often was the market trading in that state?” We found that 20% of the time the US market traded in the decile of 8.1x to 8.8x EV/EBITA. Twelve percent of the time the market traded below 8.1x and 14% of the time the market was trading above the most expensive decile >12.3x. At 17.2x EV/EBITDA multiple, the US market is clearly expensive.

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Disclaimer: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and ...

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