U.S. Equities: Absolute and Relative Valuations By Market Segment

by: J.D. Steinhilber

The following table presents a valuation analysis of the U.S. equity market segmented by market capitalization (e.g. large-cap, mid-cap, small-cap) and style (e.g. growth, blend, value). For each asset class, we compare the most recent month-end valuation statistic to all valuation statistics for that asset class since 1/1/94.

We examine four valuation statistics: price-to-sales, price-to-earnings, price-to-book value, and dividend yield. To identify potentially overvalued or undervalued asset classes, we highlight current readings that fall into the highest or lowest quartiles of readings since 1/94. Current statistics that fall into the highest valued quartile are highlighted in red while readings in the lowest valued quartile are highlighted in green. For dividend yield, a higher percentile ranking indicates a lower valuation. For the other three valuation measures, a lower percentile ranking indicates a lower valuation <[click for larger version]:



The following table examines the relative valuation between the broad segments of the U.S. equity market. We assess relative valuation by analyzing the spread, or difference, in the valuation statistics of one market segment versus another. Current valuation spreads are then compared, on a percentile ranking basis, to the range of valuation spreads since 1/1/94 [click for larger version]:

Our conclusions from this valuation data on this page: i) Large-cap stocks are more attractive than small-cap and mid-cap stocks, and ii) Growth stocks are more attractive than value stocks. The fact that a number of asset classes appear expensive according to the price-to-sales measure and inexpensive according to the price-to-earnings measure is explained by record high profitability.

The current profit margin of the S&P 500 is at an historic high of 8.9%, substantially above the average of the past 15 years, which is 6.5%.

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