Daily Spotlight: Valuation Measures Reasonable

Summary

We have different ways of looking at market valuations, and most are signaling that stocks are reasonably valued, though hardly bargains. Our Stock-Bond Barometer asset-allocation model is indicating that the two major portfolio asset classes are near parity on valuation. The model goes back to 1960. The output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model is a modest premium for stocks, of 0.18 sigma, with a standard deviation of 1.07. So stocks normally sell for a slight premium valuation compared to bonds, which has been the case since inflation — and bond yields — jumped in 2022. The valuation level now is a 0.56 sigma premium for stocks, not a discount but easily within the normal range. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is approximately 22, within the normal range of 15-24. On price/book, it is no surprise that stocks are priced at the high end of the historical range of 5.5-1.8, given that tech stocks, with low capital bases, are the biggest component of the market. The current S&P 500 dividend yield of 1.11% is below the historical average of 2.9%, but the relative reading to the 10-year Treasury bond yield is 26% compared to the long-run average of 39% and the all-time low of 18%. On price/sales, the current ratio of 3.3 is above the historical average of 1.8, but well below the 4.0