The S&P 500, and many other key stock indices, are overpriced when measured by all major historical stock market valuation tools. That includes aggressive share buybacks, weak corporate earnings, and high stock market valuations.
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New York, United States (PRWEB) April 10, 2015
Lombardi Publishing Corporation (http://www.LombardiPublishing.com), a 29-year-old consumer publisher that has served over one million customers in 141 countries, is warning that the S&P 500 is now overvalued by all historical stock market valuation tools.
“The S&P 500, and many other key stock indices, are overpriced when measured by all major historical stock market valuation tools. That includes aggressive share buybacks, weak corporate earnings, and high stock market valuations,” says economist and lead contributor Michael Lombardi.
In the fourth quarter of 2014, S&P 500 companies purchased over $125 billion worth of their own shares. In fact, during that period, 72% of S&P 500 companies were involved in buying back their own shares. In the trailing 12 months, they spent more than half a trillion dollars on buybacks. (Source: “Buyback Quarterly,” FactSet web site, March 16, 2015; http://www.factset.com/websitefiles/PDFs/buyback/buyback_3.16.15.)
Lombardi explains that while investors believe share buybacks increase shareholders’ equity, the fact of the matter is that share buybacks are a financial tool businesses used to prop up their per-share earnings. Instead of investing in growing their business by spending on research, new marketing channels, or plants/equipment, companies are draining their cash by buying their own stocks back. This suggests brands do not have the confidence they need to profitably grow their business.
Corporate earnings are also worrisome. In the first quarter of 2015, S&P 500 companies are expected to report the biggest decline in their corporate earnings since 2009. Corporate earnings are expected to fall close to five percent in the first quarter, while revenues are expected to decline by almost three percent. (Source: “Earnings Insight,” FactSet web site, March 20, 2015; http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_3.20.15.)
“Despite aggressive share repurchase programs and weak corporate earnings, valuations are extreme. To assess the valuation of the stock market, we need to look at the price-to-earnings ratio that’s adjusted for cycles and price changes, also referred to as the CAPE ratio,” Lombardi adds. “In February, the CAPE ratio for S&P 500 companies stood at 27.85, the highest level since 2002. What this number means is that for every $1.00 of earnings a company makes, investors are willing to pay $27.85.”
Comparing the current valuation of the S&P 500 to its historical average of 16.59, the stock market is currently overvalued by 68%. Since 1881, the CAPE ratio for the S&P 500 has gone above 27.85 just four percent of the time.
“What’s actually driving the S&P 500 higher? Investors don’t seen to care about fundamentals anymore; it’s the Federal Reserve that’s driving the stock market higher,” Lombardi concludes. “A stock market that rises on the anticipation of the Fed coming to its rescue is not a healthy market, nor a real one.” Lombardi notes that the main stock indices, like the S&P 500 and the Dow Jones Industrial Average, are overpriced by every indicator he follows, and it’s only a matter of time before stocks fall flat on their face.
Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation, visit http://www.LombardiPublishing.com.