S&P 500 Earnings: The Fallacy of Valuation and Non-US Investments
2024.12.10 03:14
Credit spreads – quite remarkably – continue to tighten, as high-yield credit spreads, which peaked in mid-September ’24 (per the Bespoke data) around +344 – 350 the equivalent Treasury, have now narrowed to +266, as of last Friday’s data.
The high-grade spread has narrowed from 101 around mid-September, to +80 as of last Friday.
Credit spreads continue to hover around “all-time tights” so just be aware of the relative and absolute valuation within the corporate bond space.
S&P 500 Data:
- Last week the forward 4-quarter (FFQE) estimate slid to $263.36 versus last week’s $263.58 and early October’s $266.66;
- The PE ratio was 23.1x at the end of last week, versus 22.9x the prior week;
- The S&P 500 earnings yield ended the week at 4.32% and continues to slide lower;
- Here’s the expected S&P 500 EPS growth for the next three years per the LSEG data:
- 2026: +13%
- 2025: +13%
- 2024: +10%
Most people might be tempted to ask, “Do I believe the numbers ?” which is what one reader did a year ago about 2024’s expected EPS growth, and the way I answered that is “the numbers are the numbers”. These estimates are the sell-sides best guess of EPS growth for the next few years.
A corporate income tax rate reduction from today’s 21% to maybe 17% – 18% would help the S&P 500 EPS growth rate for sure, but the deficit is going to keep a lid on too aggressive tax cuts in 2025 (in my opinion).
The Fallacy of Valuation:
Just have to take a shot at all of the morally pious prognosticators about the valuation of the US stock market(s), and yet whenever there is a graph or table comparing US to Non-US or emerging market, or developed Non-US markets, you rarely hear the same crowd advocating for Non-US exposure – despite attractive relative (and even absolute) valuation differences.
Why? Because no one wants to look like a jackass 12 months from now when the S&P 500 could be up 10% – 15% after an average year, and the international equity indices have another year of 3% – 5% returns, despite those attractive valuations.
“Valuation” is rarely a good timing tool.
That being said, here’s a list of charts, tables, etc. from sources I trust on X, about the valuation differences between US and Non-Us, just gathered in the last week to 10 days:
Found this today, Monday, December 9th on X. Never seen the comparison before. More of a market-timing signal.
This is from Mike Zaccardi from X. Relative valuations. Note US vs emerging markets. Gives the regional valuation differences as well.
This Trendspider chart shows the bumping the high-end of it’s trading range. Like the first chart above (“cash yields”) this is less about the US vs Non-US and more about a market-timing signal, but of the US stock markets as represented by the S&P 500, , etc. start to flag, it could well be the catalyst for the international markets to start to outperform on a relative basis.
This is another Mike Zaccardi special from X, but it looks very similar to a JPMorgan “Guide to the Markets” chart.
The left-hand side of the page shows the PE discount to the US for the MSCI, and it’s way beyond the normal standard deviation range. The right-hand side of the graphs shows the relative dividend yields between the two asset classes.
This graph is from Charlie Billelo’s post on X, showing the relative PE ratios.
CNBC’s frequent guest Stephanie Link showing non-US small-cap value, vs US large-cap growth, above. From a December 6 ’24 post.
Conclusion:
This post wasn’t meant to torture readers but to show how talk of “valuation” can rather one-sided. Very few if any strategists, portfolio managers, etc. are advocating a wholesale rebalancing of client portfolios from US equity to non-US equity, despite the very attractive relative and absolute valuations found outside the US today.
It’s a repeat of the late 1990’s and anyone who lived through that (i.e. March 2000 through March 2003) saw the dramatic rotation from US large-cap growth and technology into small and mid-cap, equal-weight, and any kind of international investment, and it happened almost overnight.
The has a lot to do with capital flows from US to non-US, as the dollar started to weaken in 2000 and stayed that way for a few years.
The Trump Administration is the wild card here. President Trump’s policies could go either way in terms of strengthening or weakening the dollar, with my own bias today (and this could change) that the new Administration will pursue policies that are likely to result in a slightly stronger dollar over time.
These kinds of articles are written to force me to continue to hone in what’s cheap and out-of-favor, even though – like everyone else – clients have seen some allocation to non-US equity, but it’s not as material as it probably should be.
Disclaimer: None of this is advice or a recommendation but only an opinion. Past performance is no guarantee of future results. Investing can and does involve the loss of principal, even for short periods of time. All S&P 500 EPS data is sourced from LSEG.com. All information above may or may not be updated, and if updated, may not be done in a timely fashion.
Thanks for reading.
