The High Valuation of the S&P 500 Index is Not Without Merit
Valuation metrics for global equities have been on the rise after their fall last December. The S&P 500 index has seen an especially strong recovery in its valuation, which had dropped to around its historical average but is now above the 75th percentile across a range of different metrics. At the same time, other equity indices are now around or below their historical average, making the S&P look overvalued. But it is important to keep in mind that firms in the S&P are very profitable, well above their global peers, justifying to a degree their outsized valuations on a relative basis. For example, when looking at price-to-book (P/B) ratios versus return on equity (both over the next twelve months), we see that the S&P is not a particular outlier even though its current P/B ratio is around its 95th percentile historically.
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