With the stock market down about 20%, I’ve been getting asked if stocks are now cheap. I’ve also heard some folks state, rather matter-of-factly, that stocks are now reasonably priced.

However, stocks are neither cheap nor even fairly-priced…yet.

To illustrate why I believe stocks are not yet cheap, it helps to contrast current conditions to those of a period when stocks were actually objectively fairly-priced in the past.

The first image below is a matrix of potential forward 12-year returns for the U.S. stock market as of thirteen years ago (06/30/2009).

The purpose of using a matrix like this is to show a range of potential returns under a variety of market conditions since we can’t know exactly what will unfold in the future.

The blue box in the middle of the matrix indicates the forward return when profit margins, sales growth and price/earnings end up being about average. The forward annualized return under those average conditions was about 9.7%, which is almost perfectly in line with the long-term historical annual return for the U.S. stock market.

Notice in the footnote that the 3-year treasury yield at that time was 1.64%. In other words, forward stock returns looked very attractive on both an absolute basis and also relative to very safe assets. Heck, even the S&P 500 dividend yield of 2.76% at that time was far more attractive than the 3-year treasury yield of 1.64%.

In 2009 the S&P 500 was trading at less than 1x sales! Remember that stat as we’re going to compare to the current price / sales ratio down below. The long-term average price / sales is about 1x, which is the level where forward annual returns end up being about 10%.

Below is the same matrix of returns as above using the same methodology but updated with today’s data (well, 03/31/2022 data).

Notice the blue box this time. If we get average sales growth and end with average profit margins and price/earnings in 12 years, the S&P 500 annualized return will be a 0.7% annualized loss compared to a 9.7% annualized gain back in 2009!

Why is this so much worse today than in 2009? Because the starting point of valuations today is so much higher. In other words, the market today is much more expensive than the market in 2009. That makes sense considering 2009 marked the bottom of a 55% bear market loss in U.S. stocks.

Furthermore, generally observe and compare the range of returns between the two matrices. The 2009 matrix has no negative returns listed at all while the current matrix has a majority of negative returns for the given potential conditions (not all conditions and potential outcomes included obviously).

Today’s situation is basically the complete opposite as 2009’s situation.

In 2009, the dividend yield was about double the 3-year treasury and the expected return for U.S. stocks was about 6x the 3-year treasury yield.

Today, the dividend yield is less than half the 3-year treasury yield and the average expected return is a loss for the next 12 years while a 3-year treasury, as of this moment, will return almost 4% if you simply buy and hold!

Today’s matrix is a sea of red while the 2009 matrix was all black.

Price / Sales

Remember when I pointed out that the price / sales in 2009 was less than 1x? Well, as of 3/31/2022 the price / sales was 2.8x! Even today as I write this that ratio is around 2.3x.

Price / sales (P/S) has a -0.9 correlation with subsequent 12-year returns meaning the higher the ratio the lower the forward returns have historically been.

It’s just math… imagine that P/S ratio falls back towards 1x from 2.3x and sales grow at the long-term average rate of 4% per year over the next 12 years with a 1.6% dividend yield. The annualized return will be a 1.4% loss over the next 12 years —>

( 1 / 2.3 )^( 1 / 12 ) x ( 1 + 4% sales growth ) -1 + 1.6% dividend yield


In summary, based on this analysis, along with the most reliable valuation metrics I’ve shared in previous commentaries, the U.S. stock market is nowhere near cheap…yet.

However, I believe the U.S. stock market will eventually get there at which point I’ll be one of the few voices talking about how attractive stocks are when everyone else has written them off and selling their stocks. I’ll be one of the few actually making portfolios more aggressive at that time. However, we don’t know how long this adjustment period will take. It could take another 12-18 months for the U.S. stock market to bottom if history is any guide, but nobody knows. In the meantime, there will likely continue to be strong rallies and sharp downturns along the way.

Assumptions Used in Matrices:

2009 matrix:

  • S&P 500 price = $919.32
  • S&P 500 sales per share = $943.25 (or less than 1.0 price / sales)
  • S&P 500 dividend yield = 2.76%

2022 matrix:

  • S&P 500 price = $4,530.41
  • S&P 500 sales per share = $1616.48
  • S&P 500 dividend yield = 1.41%


Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.

Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here. Any forecasts made are the opinion of the author. Markets are famously difficult to predict precisely because so many factors are involved…particularly over short time periods. And many folks don’t have the patience to see long-term forecasts play out because so much can happen in the interim..

This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.

Views provided here are current only as of the moment of posting and are subject to change at any time without notification.

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