Ned Davis Quoted In Marketwatch Article On P/E Ratio

Ned Davis was quoted in a Marketwatch article last weekend musing about the S&P 500’s price-to-earnings ratio and price relative to sales, concluding that the index is relatively overvalued by those measures. 

The above chart, from Ned Davis Research, shows that price relative to sales for the S&P 500 is at a record high, “well in excess of what they were in 2000 or 2007 at those peaks,” Davis said. 

“One caveat to these analyses is that they don’t take into account the effects of interest rates,” points out Marketwatch reporter Chris Matthews. “The average effective Fed funds rate since 1964 is about 5.2%, versus 1.6% today, and one might expect equity valuations to be significantly higher when fixed income investments are yielding so little.”

Davis added that the S&P could be overstating earnings because of corporate buybacks and other financial engineering methods. Even when taking into account the ratio of market valuations to overall profits, however, “P/E ratios are some 80% above the long-term norm,” said Davis.

You can read the full article here: The S&P 500 is now more overvalued than ever, per this measure.