Snap AV: US valuations eclipse dotcom madness

Across the history of raging bull markets, there’s one unifying factor: humiliation of the bears.

And so it’s been over the past decade in US stocks, with storied naysayers such as Jim Grant, Jim Chanos and John Hussman a focus of almost consistent acrimony as the equity markets drifted higher and higher.

Some of it, of course, is warranted. Much of the bears fears over the Fed’s monetary stimulus causing runaway inflation were misguided, while earnings growth, thanks mainly to record margins, has been consistently strong since the turn of the last decade.

That’s not to say, however, that the bears are not worth listening to. So it was this morning when we sat down to read Hussman’s latest market commentary, published a few days ago.

And while we were expecting John’s usual mix of detailed commentary backed up with solid data, we weren’t quite expecting to see this chart which he put together for the piece.

It shows the median price-to-sales ratio of the bottom and top deciles of the S&P 500 by market capitalisation. For instance, in the top decile — ie, mega-caps such as Google, Microsoft and Apple — this will be the valuation of the middle stock, and not the most expensive one. So bear that in mind when you gawp at it:

Yes, that’s correct, the median valuation of the 10 per cent largest companies in the S&P 500 is now above the levels of the dotcom boom. Here’s Hussman’s take:

The current situation would not be as dangerous if the stocks in the highest valuation deciles accounted for a small percentage of S&P 500 market capitalization. Unfortunately, that is not the case. The largest S&P 500 components by market capitalization have eclipsed the price/revenue multiples observed among the largest stocks at the 2000 pre-collapse peak, while the smallest S&P 500 components have eclipsed the price/revenue multiples observed at the 2007 pre-collapse peak. As my friend Jesse Felder puts it, this is an “everything” bubble.

Of course, the caveat applies here that the top stocks of the S&P 500 are extremely profitable, fast growing and well run businesses with defensible products and services, so they deserve some valuation premium. Yet, could the same be said for the companies at the other of the market capitalisation spectrum? We’re not so sure.

Anyway, thoughts and comments welcome below.