QQQ - SPX: Comparing Valuations To 2000 Peak Ignores Vastly Different Economic Outlook

2024-03-10 01:37:21 ET

Summary

• Investors have played down valuation concerns as they still compare favourably to the 2000 bubble peak, but when the growth outlook is taken into account, the outlook is far worse.
• In 2000, corporate profits were just one part of a large national savings pool, but unsustainable fiscal deficits have driven up profit margins to record highs and driven savings negative.
• This has left the economy with extreme imbalances that will need to be corrected over the coming years to the detriment of profit margins.
• If profit margins were to move back to the levels seen in 2000, a real required rate of return of 6% would put the S&P 500's fair value PE ratio at around 6x.

As the S&P 500 has risen to new highs, analysts and investors have played down valuation concerns as they still compare favourably to the 2000 bubble peak. Justifying expensive valuations by comparing them with the biggest bubble in US history tells us something about the bullish sentiment in the market, but it also ignores the deterioration in the economy since then. Specifically, the evaporation of the pool of US savings, which forms the basis of future corporate profits....

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