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3 Jul 2014
Valuation of the US equity market an increasing focus of debate - Goldman Sachs
FXStreet (Barcelona) - The Goldman Sachs team of analysts point out that many common measures of ‘macro valuation’ are currently above their historical averages but that valuation measures that compare equities to government bonds still look favourable.
Key quotes
"Medium-term equity returns, like bond returns, are well captured by their current earnings yield and changes in the earnings yield. Although current earnings yields are lower than average, what matters is whether they are inappropriately low."
"Theory supports the idea that the required return should vary with the macro environment, so a simple comparison with past averages will always be an incomplete guide."
"All else equal, a sustained decline in thebrisk-free rate should in theory be associated with higher equity valuations on many measures. The empirical evidence also points in this direction, although not always reliably."
"If real risk-free interest rates are sustainably lower than in the past, it seems reasonable to expect equity valuations to be higher than normal and perhaps to move higher still."
"The bad news is that the argument that equity valuations may remain high essentially implies that expected future returns will be low by historical standards across assets."
"While that may allow equity markets to run further, it means diminishing opportunities for investors over the long haul."
Key quotes
"Medium-term equity returns, like bond returns, are well captured by their current earnings yield and changes in the earnings yield. Although current earnings yields are lower than average, what matters is whether they are inappropriately low."
"Theory supports the idea that the required return should vary with the macro environment, so a simple comparison with past averages will always be an incomplete guide."
"All else equal, a sustained decline in thebrisk-free rate should in theory be associated with higher equity valuations on many measures. The empirical evidence also points in this direction, although not always reliably."
"If real risk-free interest rates are sustainably lower than in the past, it seems reasonable to expect equity valuations to be higher than normal and perhaps to move higher still."
"The bad news is that the argument that equity valuations may remain high essentially implies that expected future returns will be low by historical standards across assets."
"While that may allow equity markets to run further, it means diminishing opportunities for investors over the long haul."