Median Stock Valuations Expand Again to at Least a 15 Year HighApril 10, 2014
Many market commentators have recently been claiming that stock valuations are “fair” or “average” and are basing these statements primarily on forward P/E ratios derived from market cap weighted indices like the S&P 500. At least two problems with this methodology come to mind. First, forward earnings, as we all know, are based on analyst estimates that are often (or usually, as the case has been) revised lower. Second, using market capitalization to weight the earnings biases the derived P/E towards the P/E’s of the largest companies in the sample. One way to address both of these problems simultaneously is simply to measure valuation based on realized financial history of the median stock in the index. When one does this we see that valuations are mostly far from average and in the case of the Price to Sales ratio, the median stock has never been valued more richly. Below we show the valuations for the median stock in the MSCI World Index.