Why U.S. stock market valuations are completely insane

A highly-respected Australian fund manager has demonstrated why stock market valuations in the United States are completely insane, when taking inflation into account.

In a presentation at an Australian investment conference, Chief Investment Officer of Antipodes, Jacob Mitchell, revealed 70 years of stock market data that matches S&P500 trailing price to earnings (P/E) multiples with inflation.

At 8.5% inflation, the S&P500 has historically traded at an average P/E multiple of 12x.

Currently the average S&P500 valuation trades at close to 20x.

Stock market
Image: Antipodes/Youtube

“Fair value at 8.5% inflation is closer to 12 times, now we all know inflation is not going to stay at 8.5%. For a number of reasons it’s going to start rolling over,” said Mitchell.

“Where we think inflation settles – the exit level of inflation – is what really matters and we actually think it’s probably between 4% and 5%. So that means at a 20x average multiple there’s more downside from a de-rating perspective in the market.”

Stock markets
Image: Antipodes/Youtube

Following an August inflation print of 8.3% (year-on-year) on Tuesday, key U.S indices recorded their worst single-day crash since early 2020, while the yield on 2-year US Government bonds hit 3.8% – the highest in 15 years.