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Stock Valuations, Oh My!

Money never sleeps and that’s especially true when there’s a fresh gloom-and-doom message to be shared by the bears. (I’m looking at you Ray Dalio).

So, what’s the latest reason the sky is about to start falling for investors?

Valuations, of course.

To be fair, like a broken clock, these bold pronouncements surface every few months in bull markets. (Yes, we’re still in a bull market).

Case in point: In mid-November 2024, good ole Joseph Adinolfi from MarketWatch pedaled this gem:

“Yes, stocks are crazy expensive right now. These 5 charts show just how extreme valuations have become.”

And what happened since that time?

The $SPX ( ▼ 0.15% ) and $NASDAQ ( 0.0% ) Nasdaq notched nine and six new all-time highs, respectively. Valuations be damned!

I know I’m only supposed to share one headline. But that’s the point – the mainstream financial press is programmed to regurgitate, not interrogate.

By that I mean, they endlessly repackage their own and others’ ideas into what seems like different headlines, but ultimately they are the same. (See for yourself here, here and here.)

Done enough times, this lackadaisical “put it on repeat” approach serves to brainwash investors and scare them stockless.

But in this case, if we do the interrogation, it’s clear the last thing we should be doing right now is selling.

Or more simply put, this bull market has much more room to run…

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Finance Bros Revert, Stocks Don’t

Take any independent thinking, fresh out of college finance major and stick him in NYC. And voilà!

It’s only a matter of time before his fashion sense reverts to the finance bro norm of fleeces (or vests) and khakis.

Those same Wall Street pros would like us to believe that stocks succumb to a similar gravitational pull when valuations get overstretched.

Therefore, they routinely repeat the mantra – “Stocks always revert to the mean.”

The only problem? They don’t!

• Not over the short-term: Per Carson Investment Research, there is literally no correlation between valuations and returns for the S&P 500 over the next 12 months. (If you care for the technical details, the R-Squared value is -0.01.) As you can see in the Rorschach inkblot-esque chart above, using valuations to predict future stock prices isn’t useful at all.

• Not over the long-term: Per Goldman Sachs: “There is no evidence of mean reversion in equity valuations; valuations do not have to revert to any long-term mean over any specific horizon.”  This isn’t just a U.S. phenomenon, either. It’s universal. As Goldman continues, “Across all [eight] metrics and four countries or regions, we have not found any statistical evidence of mean reversion, with the exception of price-to-forward earning in the U.K.”

If Valuations Don’t Tell Me Where Stock Prices are Headed Next, What Does?

Earnings! If they’re going up, stocks are destined to head higher still.

Frankly, there’s no stronger correlation in the markets, as you can see here.

The good news? Earnings keep climbing (much) higher.

Consider:

• Rearview: For the fourth quarter of 2024, S&P 500 earnings increased 18.2%, based on the latest FactSet tally. To put that into perspective, it represents the highest year-over-year earnings growth rate in three years.

• Front view: For the year ahead, analysts currently expect S&P 500 earnings to grow a solid 12.1%.

ONE INVESTMENT INSIGHT + + +

The Big Skinny...

Telling me stocks are expensive doesn’t tell me where prices are headed. In the short- or long-term. Stocks that are expensive can get even more expensive still.

To the contrary, earnings can tell us where prices are headed next. And I’m happy to report, they firmly point to even more gains ahead.

Additional data confirms my bullish bias, too. Like the fact the average bull market lasts 63 months and we’re only 28 months into this one.

Does that mean we should throw caution to the wind and blindly buy every dip in the Mag 7 stocks – $AMZN ( ▼ 0.51% ) , $AAPL ( ▼ 0.41% ) , $META ( ▲ 0.55% ) , $MSFT ( ▼ 0.34% ) , $NVDA ( ▼ 2.34% ) and $TSLA ( ▲ 0.71% ) – or S&P 500 and Nasdaq?

Hardly! I’ll give the permabears partial credit. We need to be more value-oriented and opportunistic if we’re looking to maximize our returns.

Any areas of particular interest and value, you say? Thought you’d never ask.  

We’ll be covering those topics and more today on the inaugural episode of…

The Big Skinny Show at 2pm ET

Joining me will be the CEO of one of the most innovative and potentially life-saving medical devices seeking FDA approval – Rob Eno of $BEAT ( ▼ 2.51% ) .

I’m also honored to have my friend Thomas Hayes of Great Hill Capital stopping by to share his insights and best investment ideas right now. He’s the greatest hedge fund manager you haven’t heard. Until now.

Tune in on your favorite streaming platform:

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And don’t stop believin’!