At the annual CFA Forecasting Event on May 24 in Cyprus I presented “A Smarter Way to Look at Market Multiples and the P/E of the S&P 500”. My goal was to remind everyone that the relationship between multiples and fundamentals continues to exist. This was not just a theoretical/academic exercise but a truth that occurs in the markets. As investors we either agree with the market and accept the fair return implied in a stock and/or we seek cases where there is a disconnect. Of course, there is a lot packed into this presentation but I hope it helps some people understand why multiples are where they are.
As this was a forecasting event, I put in a few slides showing a simple valuation on the S&P 500. As an active stock picker I’m not really concerned about the wider market but about the stocks that I like based on my own risk/return profile. Still, the examples are there to provide a basis for any reader to think about. In my opinion, Michael Lewis’ Moneyball holds true not only in baseball but in investments as well. Forming portfolios that are qualitatively and quantitatively superior to the market is achievable and has been proven by several quality-oriented managers over the last 20 years.
