ITPM Flash Ep29 is a video series from the Institute of Trading and Portfolio Management (ITPM), founded by Anton Kreil, that provides market insights from the Institute’s senior trading mentors.

ITPM Flash Ep29 – Summary

In this episode ITPM senior trading mentor Jason McDonald talks about asset valuation.

  • After the market rally into year end 2023, Jason and the other senior mentors at ITPM often heared that, in respect to stock market valuation, equity markets are expensive
  • The NASDAQ is trading at 25X forward earnings. If compared with the average of the last 10 years, that puts it in the 83rd most expensive valuation percentile and the S&P in the 86th percentile (see screenshot for historic valuations)
  • Even in the US you can still find relatively cheap sectors: Energy, Small Cap Value, Utilities and Staples
  • Jasons states that in the first two weeks of the year defensive stocks have outperformed cyclical sectors.

Is the valuation of the S&P500 fair?

  • If forward looking growth of S&P500 is estimated between 0% to 5% is it safe to say that the S&P500 is expensive at 4,800 (current level)?
  • We can deconstruct the level of 4,800 into a 12 month forward looking valuation and the EPS on index level is $225 (assuming a growth rate of 3%-4%). That puts the S&P on a forward PE ratio of 21 times. Which is an equivalent of an earnings yield of 4.75%.
  • Equities always should pay a risk premium over the risk free reate or US treasuries. Why? You could just hold the US treasury bonds instead (which are considered ‘risk free’)
  • The multi-decade average real return of global exuity markets is cash + 4.5%
  • If you take the S&P index, which is an market cap weighed index, so it includes the biggest companies in the US, you could say, that their pricing power is huge. This means that the forward earnings yield of 4.75% can actually be seen as a real return (because of their pricing power of mega cap)
  • This would fairly price the S&P at the current level of 4,800!
  • Jason is suggesting that the current valuation of the S&P500 index may be priced for a weak but not recessionary economy.

Yield Curve and Recession Playbook

  • Front end yields (shorter term yields) have come down in anticipation of rate cuts by the FED (see Screenshot 10y US Goverment Bond Yield came down in November and December 2023 from around 5% to 3.8%
  • If we take a look at the 10y US Goverment Bonds in the beginning of the year we see that it has risen quite a lot. Jason uses the term ‘bull steepening’
  • Why? Because is went down quite agressively in anticipation of FED rate cuts because of declining economic conditions
  • Right now, the economy holds up better then expected, although only slightly growing
  • This could push rate cuts out further – the bond market kinda expects this
  • It looks right now like the perfect ‘goldilocks’ environment and a soft landing: not to hot not to cold
  • But Jason reminds us to be cautious. The average yield curve inversion before a recession lasts 10 to 27 month, we are in month 22. What usually happens is that then we get a reversal of the 2y and 10y yield curve before the labor market turns recessionary
  • Where are we now? The yield curve is still inverted and the labor market is cold but not recessionary at the moment
  • Although the soft landing is the consensus view, we could still get a recession!

ITPM Flash Ep29 – Conclusion

In conclusion, McDonald’s analysis indicates that while there are pockets of overvaluation, the broader market situation suggests a nuanced perspective. Factors like sector differentials, the valuation of the S&P 500, and the dynamics of the US treasury bond market contribute to a narrative that goes beyond simple notions of overvaluation. As he highlights the importance of considering macroeconomic factors, McDonald suggests that, for now, the economic matrix points towards a scenario that may be more comfortable and predictable than initial concerns about overvaluation might suggest.

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About me

The Institute of Trading and Portfolio Management (ITPM), founded by ex-Goldman Sachs trader Anton Kreil, helped me on my journey to become a profitable retail trader

Review of ITPM Courses

The courses of the Institute of Trading and Portfolio Management helped me massively to become a profitable retail trader. I genuinely believe that ITPM provides the best trading education on the market – but not everything is perfect. Find out more in my reviews

Results of my Mentoring with Anton Kreil

In September 2022 Anton Kreil asked me and another one of his former mentees, if we want to do a webinar with him. After the Thailand class in April 2022 and the following mentoring with Anton from Mai to July 2022 I thought it was great opportunity to show what I have learned and how I have progressed

ITPM Thailand Mentoring

After completing my first ITPM Course, the PTM 1.0 (the predecessor of the PTM 2.0), I knew I want to do a mentoring. After a thorough analysis I decided to attended the April 2022 Thailand mentoring class

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