The Paradigm Shift In Valuing Stocks
Published Friday, July 24, 2020, 8:15 p.m.
After the Covid-induced bear market, when the 500 largest stocks lost 34% of their value, share prices recovered swiftly. By late July 2020, America's largest public companies traded at nearly 20 times their previous 12-month reported profits, and suddenly fears grew that a stock bubble was about to burst.
While no one can predict the next stock-market move with certainty, what's clear is that the stock market's valuation metrics have changed with the financial times. Under the current regime of ultra-low-bond yields -- a condition not expected to change anytime soon -- a new stock valuation paradigm has taken root.
Low yields on bonds make stocks more attractive investments, altering the historical relationship in the respective valuations of the world's two most fundamental investments. A higher price-earnings multiple for stocks is therefore justified by low bond yields.
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