Friday, August 3, 2012

S&P 500 Continues to be Overbought ...

With such great news regarding employment, we feel it is now logical to no longer assume a divine intervention by the Fed and Bernanke this year.  For this reason, we thought to give you an idea about just how overvalued the market has become.

Let's look at some simple numbers.  At 1393, S&P 500 is trading at 15x and 13.5x CY '12 and CY '13 EPS ("as reported" EPS), respectively.  Given that we are already half-way through CY '12, let's focus on CY '13.  The forward 13.5 P/E ratio for 2013 represents a PEG of 1.23, which is based on the 11% 5-year forward CAGR (the current consensus).  We think the market should be trading pretty much at a PEG of 1.0, which would make the forward P/E around 11.0 and S&P 500 around 1135, significantly lower than where it is today.  Another way to look at it is to say that the S&P 500 is assuming at least a 13.5% growth in EPS for the next five years, for which the probability is not very high.  We have also seen weakness in top-line guidance of many companies reporting their Q2 results.  With revenue growth barely moving, S&P 500 is trading at approx. 1.3x and 1.2x CY '12 and CY '13 sales; again a bit too high, in our opinion.  And we are assuming some pick up in revenue growth in 2013.

These are some of the reasons why we're thinking that additional monetary easing is more than priced in.  Lastly, based on what we said in March, which given the way the market has moved the last 4-6 weeks can be considered as insignificant, we were not extremely bearish regarding the equity market.  We recommended rotating holdings into more conservative sectors such as utilities and consumer staples.  We still stand by that. 

No comments:

Post a Comment