Latest inflation numbers showed some easing and with the S&P 500 Index down 15% this year (in US dollars), many commentators are suggesting that US equities now offer good value for investors. But we might sound a note of caution on valuations.
The chart opposite shows the price-to-sales ratio for the S&P 500 Index and compares it to the MSCI ACWI ex-US Index.
While we have seen a considerable contraction in valuations for the S&P 500, the current price-to-sales ratio is only back in line with the levels of the Dot-com bubble in the late 1990s – a period when US equities were significantly overvalued.
Of course, both interest rates and corporate tax rates are lower today compared to 1999, so that one can argue that one is not comparing like with like. Companies that dominate the index are also higher quality with strong competitive advantages so a higher valuation may be warranted. That said, it seems difficult to argue that valuations have reset so much that the peak valuations of previous bubbles are the justified valuations of today.
Outside of the US, valuations have also contracted and look much more reasonable. The quality of the average company in the US is higher than outside the US but such a significant discount is likely unjustified.
We have been cautious on valuations in the US for some time now. As a result, we provide detailed coverage of a number of fund’s and investment trusts with lower exposure to the US on our website along with commentary on developments in these funds and trusts on an ongoing basis.