In a recent research report, Steven Blitz, chief US economist at macro research firm TS Lombard, pointed out that the overall valuation of US stocks is now roughly in line with the yield on US Treasury bonds and the level of nominal economic growth. Future market performance will depend more on policy and economic fundamentals. The report data shows that the S&P 500's forward 12-month price-to-earnings ratio is 20.9, corresponding to an earnings yield of 4.78%; the yield on 10-year US zero-coupon Treasury bonds is 4.91% during the same period, a difference of only about 13 basis points.
Blitz compared the long-term growth levels of different assets. Over the past 10 years, the US nominal GDP has grown at an average annual rate of 5.69%. At this rate, the economy would double in about 13 years; the 10-year zero-coupon Treasury bond, compounded at a yield of 4.91%, would double in about 14 years; and using the current S&P 500 earnings yield of 4.78% for a simplified calculation, it would take about 15 years. With these three indicators in a similar range, Blitz believes that the overall valuation of US stocks is basically reasonable, and the current yield on US Treasury bonds is not yet sufficient to significantly attract funds away from the stock market.
The report also points out that valuation differences across different industries and large companies remain significant. The median forward price-to-earnings ratio for the top 20 companies by market capitalization in the S&P 500 is 24.66, higher than the overall index's 20.9. Blitz believes that as the scope for valuation reassessment narrows, fiscal policy, monetary policy, and geopolitical changes will have a greater impact on future stock returns.
