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We imagine this call is going to get a bunch of argument going about how pricey stocks are right now, and the resilience of this rally.

Goldman equity strategist David Kostin declares in his latest ‘Weekly Kickstart’ note that the market is getting pricey.

These three paragraphs pack a major punch. Bulls need to beware:

The current valuation of the S&P 500 is lofty by virtually any measure, both for the aggregate market in addition to the average stock: (1) The P/E ratio, (2) the present P/E growth cycle, (3) EV/Sales, (4) EV/EBITDA, (5) Free Cash Flow yield, (6) Price/Book along with the ROE and P/B relationship, and compared with the levels of (6) inflation, (7) small 10-year Treasury yields, and (8) real rate of interest. Moreover, the cyclically-adjusted P/E ratio suggests the S&P 500 is presently 30 % overvalued in regards to (9) Operating EPS and (10) about 45 % overvalued utilizing As Reported earnings.

Reflecting on our current customer check outs and conversations, the greatest surprise is the number of investors expect the forward P/E multiple to broaden to 17x or 18x. For some reason, many market individuals think the P/E multiple has a long-term average of 15x and therefore expansion to 17-18x appears affordable. But the typical perception is wrong. The forward P/E ratio for the S&P 500 throughout the previous 5-year, 10-year, and 35- year durations has balanced 13.2 x, 14.1 x, and 13.0 x, respectively. At 15.9 x, the present aggregate forward P/E multiple is high by historic requirements.

Most financiers are shocked to find out that considering that 1976 the S&P 500 P/E multiple has actually only gone beyond 17x throughout the 1997-2000 Tech Bubble and a quick four-month duration in 2003-04. Other than those 2 episodes, the United States stock market has actually never traded at a P/E of 17x or above.

As you can see in this graph, since 1976, the only times that PE ratios have actually been higher than where they’re now were during the tech bubble.

PE ratio distrubtion

And if you look at typical PE ratios, this moment looks even richer.

median PE ratios

What’s more, recalling with a number of cycles, we are above where we generally are when the market peaks.

Screen Shot 2014 01 13 at 5.08.02 AM

The rest of the note walks with other indicators suggesting market splendor.

Kostin does not think markets are going to tank or anything like that. Instead it’s simply predicting modest gains. However still, this is a level of uncertainty to the genuine bull case that we are not utilized to seeing at all from the street today.

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