U.S. Stocks Remain Expensive – Goldman Sachs

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Goldman Sachs analysts told clients in a note on Monday that U.S. stocks “remain expensive vs. history.”

The analysts told investors that the S&P 500 index has declined by 23% from its peak in January, but most absolute and relative valuation metrics show that U.S. stocks are still pricey.

“Investors repeatedly ask us where they should be looking for bargains. Four ideas: (1) Short duration and Value stocks look attractive relative to long duration and Growth stocks. (2) While Growth appears expensive at the factor level, at a stock level the sharp sell-off has created opportunities in select profitable growth stocks. (3) Although recession risk is elevated, some cyclicals trade at depressed valuations vs. history. (4) U.S. small cap stocks trade at much more attractive valuations than large-caps,” wrote the analysts.

The analysts went on to explain that U.S. stocks also remain expensive relative to interest rates.

“Despite elevated recession risk, geopolitical tension, and a generally murky macro outlook, the earnings yield gap – a common proxy for the equity risk premium – trades close to the tightest levels in 15 years. Relative to both real 10-year Treasury yields and investment-grade corporate bonds, the S&P 500 index valuation ranks above the 75th %-ile since 1980,” they added.

“Given the sharp decline in share prices and multiples this year, investors often ask us where they should be looking for bargains. With the S&P 500 trading 2% above our base-case year-end target of 3600 and 17% above our hard-landing scenario downside target of 3150, the risk/reward for owning the broad U.S. equity index is unattractive.”