Trend of the past years when US equities have showed significantly better performance should in our view gradually reverse (mean-reversion). And this primarily due to valuation reasons. We are of the view that US equities are tremendously overvalued. The following table illustrates it well.
Source: Bloomberg
US market cap / GDP, Warren Buffett’s favorite indicator, is currently at 186 % which corresponds with the level of 95 % historic percentile. The closer 100 % the higher valuation. EV/Sales indicator is currently at the level of 13.1x multiple which corresponds with the level of 99 % historic percentile. Favorite indicator EV/EBITDA is at extremely high level of 13.1x multiple which corresponds with the level of 95 % historic percentile. Other important indicators follow with similar percentile values. The only exception is the last indicator which shows relative valuation attractiveness US equities against US government bonds (Treasuries). Its value is relatively low. Nevertheless this indicates only the fact that bonds are on a relative basis against equities even much more expensive. Median percentile value is 90 % which is really very high. This indicator tells us that in history US equities were more expensive only in one tenth of the covered historic period. Second part of the table showing values for the median stock from S&P 500 index indicates even higher valuation plateau. Also our proprietary indicators show that US equities are really significantly overvalued. Among them is predominantly the so-called composite valuation which I developed in 2018. Conclusion is in my opinion unambiguous. US equities are too high to carry a solid potential for high performance in upcoming years, i.e. in the mid-term horizon. US equities have been rising strongly in the last ten years since the global financial crisis while all other regional markets have been lagging behind strongly. What triggers do I see in favor of significant US equities underpeformance? Firstly a victory of a democratic candidate in the US presidential elections. Secondly new pressures in the trade war between the US and China. And thirdly any mistake in the Fed’s monetary policy or more precisely sooner than currently anticipated end to Fed’s balance sheet expansion within the “not-QE” program.
Michal Stupavský
Investment Strategist Conseq Investment Management, a.s.