More Expensive Than Ever?! (No)

Profit margins are high, so I’ve seen many bears resort to using price-to-sales as their go-to barometer of market valuation. My data-torturing heckles are up a bit (as is, if you torture the data long enough it will tell you anything you want to hear).  Price-to-earnings doesn’t tell a catastrophic story, nor does market level price-to-sales, so lately some have resorted to median price-to-sales. On this measure, the S&P 500 is more expensive than ever! Lookout below!!! Price-to-earnings and even market level price-to-sales refuse to cooperate with the bear argument, so this new valuation method has become popular because it suits the bear story. So let’s look at some price-to-sales stories over the past 50 years.

First up is a long-term look at market level price-to-sales (sum of all market caps in U.S. stocks divided by sum of all sales for U.S. stocks) compared to median price-to-sales for all investable U.S. stocks[i].

You can see that there have been large divergences between median and market level price-to-sales since 2002 or so, and the median p/sales is currently 27% higher than the market level p/sales. Across the full sample, the median p/sales and market p/sales track more closely, with the median being 7% higher than market level p/sales, on average.

A second interesting way of looking at price-to-sales is to look at the distribution of price-to-sales ratios in today’s market versus the very long term.

Like the first chart, this paints today’s market as richly priced, but not outrageously so. For the past 50 years (dotted line), the most common p/sales ratio is roughly 0.6 (the peak of the chart). Today, the most common ratio is roughly 0.9.  The right (expensive) tail is also interesting. Over the long term, 11% of stocks trade at a p/sales ratio great than 3; today, 21.5% of the market trades at a p/sales above 3.

Bottom line: the U.S. market is on the expensive side. But it’s not “more expensive than ever,” not by a long-shot. The current market level price-to-sales (1.53) is 30% lower than its all-time peak (2.21). Even the median—which is high at 1.96—is 13% below its all-time peak of 2.25.  I continue to believe that investors should build a global portfolio, because many of the best valuations are outside of the U.S. market.

 

[i] Investable = market caps > $200MM, adjusted for inflation back in time