The current market valuation of the S&P 500 (as of the morning of December 4) is as follows: P/S (Price-to-Sales) of 2.49, P/E (Price-to-Earnings) of 25.4, P/B (Price-to-Book) of 4.33, and a dividend yield of about 1.5%.
Understanding Price-to-Book (P/B) Ratio
The Price-to-Book (P/B) ratio represents the ratio of a company's market capitalization to its book value, defined as the ratio of a company's net assets (assets minus liabilities) to the number of shares issued.
Before the 2008 financial crisis, the P/S ratio averaged 1.5 from 2004 to 2007, 1.15 from 2010 to 2012, 1.65 from 2013 to 2016, and reached about 2.1 to 2.15 from 2017 to 2019, peaking at 2.4 in December 2019.
During a period of fiscal stimulus and monetary policy expansion, the P/S ratio reached 3.15 and remained in the range of 2.9 to 3.1 in the fourth quarter of 2021. For most of 2023, the market estimate of P/S has been in the range of 2.2 to 2.4.
Technology Sector Influence
P/S growth is driven primarily by technology companies, and the relatively normalized P/S range in the current market structure with a strong bias towards the technology sector is between 1.8 and 2.
P/S valuations above 2.5 occurred during a period of excessive monetary stimulus, in an environment of near-zero interest rates and highly accommodative financial conditions. This coincided with an exponential acceleration of fintech companies in the post-COVID economic recovery, fueled by targeted household assistance.
When comparing yields of alternative instruments like bonds and monetary instruments, the current market capitalization of companies cannot deviate from equilibrium levels (1.8 to 2 in P/S) for an extended period. This is because savings deplete, excess liquidity contracts and the economy enters a recession.
The upward trend is largely driven by expectations of a structural transformation of the economy through artificial intelligence (AI), which is expected to enhance the efficiency, productivity, and profitability of companies. However, the global impact of AI is currently overestimated, similar to the early days of computers, the Internet, or mobile communications. Truly fundamental breakthroughs may occur on a more localized level.
On a P/E basis, the market is overvalued by about 15% to 20%, and on a P/S basis, it is overvalued by 25%.
Conclusion
Overall, the current market valuation of the S&P 500 shows a mix of indicators, with various ratios such as P/S, P/E, and P/B signaling different aspects of market health. Historical trends show periods of stability and excess, often associated with policy actions. The technology sector plays a crucial role in the growth of P/S. While the market currently appears overvalued, the impact of artificial intelligence is critical. However, we should be cautious as the global impact of artificial intelligence may be overestimated and possible breakthroughs are localized.