Any Weather: Valuations Say Stocks are Cheap and Expensive

Key Points

  • Valuation has many shades—from black to white, with lots of gray in between.

  • But valuation is more of a sentiment indicator than a fundamental indicator.

  • Macro conditions (for now) support higher-than-average multiples; but earnings estimates for next year are cloudy at best.

“It is only in appearance that time is a river. It is rather a vast landscape and it is the eye of the beholder that moves.”

-Thornton Wilder

I’m often asked about equity valuations and whether the market is cheap or expensive (or somewhere in between). My answer is rarely any of the above because to some degree it depends on the valuation metric being used. But the reality is that valuation—regardless of metric—is as much (or more of) a sentiment indicator than it is a fundamental indicator. Yes, if you’re looking at a traditional price/earnings (P/E) ratio, it’s “fundamental” in the sense that there is an actual defined “E” (earnings) and of course there is always an actual defined “P” (price). However, there are times when investors are willing to pay very little for stocks and P/Es descend to historically-low levels—like in 2010-2011, when earnings were rebounding sharply, but investors remained skittish. Then there are times when investors are willing to pay exorbitant prices for stocks and P/Es ascent to historically-high levels—like in 1999-2000.

Back to the metrics; I often say, when speaking to a large group of investors, that I could find the most bearish person in the room, and the most bullish, and easily find a valuation metric they could use to support their view. Case in point is the valuation table below. It covers myriad valuation metrics many of which are familiar to investors but some are a tad more esoteric. Below the table I added in the definitions for each.

Source: Charles Schwab, Bloomberg, FactSet, The Leuthold Group, Copyright 2019 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to, as of November 29, 2019.


Fed Model: Compares the S&P 500’s earnings yield (which is the inverse of the P/E—or E/P) to the yield on long-term U.S. government bonds. Negative readings suggest favoring stocks over bonds.

Equity Risk Premiums: Subtracts either the forward 10-year U.S. Treasury bond yield or the forward Baa corporate bond yield from the forward S&P 500’s earnings yield (E/P). Positive readings suggest stocks are undervalued relative to bonds.

Rule of 20: Stocks are considered fairly valued when the sum of the S&P 500 forward P/E ratio and the year-over-year change in the consumer price index (CPI) is equal to 20 (or inexpensive when it’s below 20).