S&P 500 Valuations: Echoes of the Dotcom Era and Selling too Early

Comparing the current environment with the one, 26 years ago, September 1999, is a reasonable exercise. The main point is the forward Multiple (proxy), currently 22.5x vs. slightly above 23x by September 1999.

While the implied ERP is now higher and forward growth (proxy) lower. Meanwhile, the Federal Reserve is now resuming the expansionary monetary policy, while at that time it was raising interest rates (it helps to explain, at that time, higher nominal/real interest rates and lower implied ERP, below 1% vs. currently 3.8% and, probably, the abrupt adjustment a couple of quarters after). So, currently, as the Federal Reserve lowers interest rates, assuming long bond yields would come down, the forward multiple should continue to expand and the implied ERP coming down. As a value investor, I sold too early 26 years ago, over the 1H99, the risk currently seems similar, selling too early.

The U.S. Economy

1 – The US economy continues to perform, showing no clear signals of slowdown. The two monthly Fed surveys about the US economy, that we like to follow, were released last week, “Empire Sate Manufacturing”, NY Federal Reserve Bank and “Manufacturing Business Outlook Survey”, Philadelphia Federal Reserve Bank. While the Empire State Manufacturing (General Bus. Conditions index) adjusted from positive to negative territory, the Future Business Conditions was almost unchanged, the Philadelphia Manufacturing Business Outlook, improved, both Current Conditions and Future Business Conditions. The Weekly Economic Indicator from the Fed New York, provides a signal of the state of the US economy, remains in a short range, growing between 2% and 2.5%. And finally, the GDPNow model, a non-official GDP estimate of the Atlanta Fed points to, GDP 3Q25: +3.3% (September 17; 3.4% before), above consensus.
In a nutshell, remains difficult to identify signals of distress in the US economy. As a result, forward earnings consensus continues to be adjusted upwards, which shows the confidence of companies and analysts.

Equity Risk Premium and S&P 500 Multiples

2 - The US forward multiple, consensus (proxy) is now at 22.5x, has slowly expanded from around 22x, over the summer and is close to the record levels recorded over the last five years, while before, only over the dotcom bubble period, the forward multiple was higher. In fact, by September 1999, the forward multiple (proxy) was slightly above 23x; the forward growth close to 17% (currently 12.6%) and the implied Equity Risk Premium (ERP) was below 1% (currently 3.8%, nominal and real interest rates were higher, 26 years ago; current financial conditions are looser than 26 years ago). So, only forward growth is now less positive than the figures 26 years ago, as current forward PE is slightly lower, current implied ERP is higher and current financial conditions are looser. Finally, the Fed is,currently, resuming the monetary stimulus, while at that time, it was raising interest rates.

US – Manufacturing Business Outlook Survey (NY Fed)

Source: Business Leaders Survey, New York Fed (Federal Reserve Bank of New York)

US – Manufacturing Business Outlook Survey (Philadelphia Fed)

Source: Federal Reserve Bank of Philadelphia (Manuf. Business Outlook Survey)

US –Weekly Economic Index (Dallas Fed)

Source: Federal Reserve Bank of Dallas, AS Ind. Research

US –National Financial Conditions (Chicago Fed)

Source: Federal Reserve Bank of Chicago, AS Ind. Research

Forward PE* vs. Forward Earnings Growth (proxy)

* Forward Multiple – The current index divided by the 12 months forward earnings consensus (proxy). Historically, lower figures, namely below average, could indicate the stock market is undervalued and vice-versa. It is easy to calculate, straightforward, however it does not take in consideration the level of interest rates
Source: Consensus, AS Ind. Research

Forward Multiple (proxy)

Implied Equity Risk Premium (proxy)*

* ERP – the implied equity risk premium is our preferred measure to value the equity market. Basically, is a Dividend Discount Model, based on several premises that we keep over time. The historical data allows us to have a quantitative opinion regarding the equity market. The ingredients are, earnings consensus proxy, interest rates, 10-year government bonds and finally, inflation data, namely core data. Higher figures vs. historical data indicates the stock market could be undervalued and vice-versa.
Source: Consensus, AS Ind. Research

Disclaimer

This information is merely an auxiliary means of analysis to be used by its recipients, who will be solely responsible for its use, including for any losses or damage that may, directly or indirectly, derive from. The data herein disclosed are merely indicative and reflect the market conditions prevailing on the date they were collected. Thus, its accuracy and timing must absolutely be confirmed before its usage. Any alteration in the market conditions shall imply the introduction of changes in this report. This information/this opinion may be altered without prior notice and may differ or be contrary to opinions expressed, because of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. This information is not an offer to sell or a solicitation to enter any deal or contract. It consists of data compiled by or of opinions or estimates from AS Independent Research and no representation or warranty is made as to its accuracy or completeness. Reproduction is not allowed without AS Independent Research permission.
This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. 3Comma Capital does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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