Goldman's Kostin: Stocks are starting to look overvalued - The Tell - MarketWatch

Goldman's Kostin: Stocks are starting to look overvalued - The Tell - MarketWatch: "“The multiple expansion cycle provides another lens through which we view equity valuation. There have been nine multiple expansion cycles during the past 30 years. The P/E troughed at a median value of 10.5x and peaked at a median value of 15.0x, an increase of roughly 50%. The current expansion cycle began in September 2011 when the market traded at 10.6x forward EPS and it currently trades at 15.9x, an expansion of 50%. However, during most (7 of the 9) of the cycles the backdrop included falling bond yields and declining inflation. In contrast, bond yields are now increasing and inflation is low but expected to rise.

“Simply put, the earnings yield gap between the S&P 500 and ten-year Treasury yields currently equals about 325 bp. Goldman Sachs Economics forecasts bond yields will creep higher to 3.25% by year-end 2014, a rise of just 25 bp. If the earnings yield gap remains unchanged, then the ‘fair value’ multiple according to the Fed model would be 15.2x at year-end 2014.”"

'via Blog this'