Where We Stand: Valuations

BELOW IS A LOOK at today’s market valuations:

  • As of year-end 2017, the stocks in the S&P 500 were trading at a price-earnings ratio of 25, based on trailing 12-month reported earnings, making them expensive by historical standards. To view the S&P 500’s price-earnings multiple, and also its dividend yield, head to WSJmarkets.com.
  • The S&P 500 stocks ended 2017 at a cyclically adjusted price-earnings (CAPE) ratio above 32, versus a 50-year average of 19.9. CAPE compares current share prices to average inflation-adjusted earnings for the past 10 years.
  • Stocks, as of 2017’s third quarter, were trading at a 9.3% premium to the value of corporate assets, compared to an average discount of 31% since 1900. This measure of stock market value is known as Tobin’s Q.
  • U.S. stocks offer a dividend yield of 1.8%, versus 3.5% for U.K. shares, 2.7% for France, 2.7% for Canada, 2.4% for Germany and 1.8% for Japan, according to data for Dec. 31, 2017, from StarCapital.de. Using a variety of market yardsticks, the site ranks the U.S. market among the world’s most expensive.
  • For the 12 months through June 2017, reported earnings for the S&P 500 companies were 2% below their peak level, reached in the 12 months through September 2014. Still, earnings have recovered from the sluggish levels of 2015 and 2016, which helps explain 2017’s market rally.
  • U.S. equity real estate investment trusts were yielding 3.8% as of November 2017, compared to 8.8% in November 1999, as measured by FTSE NAREIT’s all equity REIT index.
  • The benchmark 10-year Treasury note was yielding 2.4% as of year-end 2017, while 10-year inflation-indexed Treasurys were yielding 0.5% more than inflation. The difference between those two yields suggests the financial markets expect inflation of 1.9% a year over the next decade.
  • At the end of 2017, high-yield junk bonds were yielding 3.5 percentage points more than Treasurys—well below the historical average.

Next: Asset No. 1: Stocks

Previous: Financial Markets

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