Sunday, June 14, 2009

Equities overpriced relative to credit

The historical average for S&P500 PE ratio over the past few years has been around 16. We are currently at the trailing PE of 15 and the estimated PE of 16. US equities are now at their historical average multiples. All the risk premium in equities has been taken out!

S&P500 level and PE ratio

But that's not at all true for credit. In spite of the massive rally we've experienced, investment grade corporate credit spreads are around 390 bp vs. pre-crisis levels of just above 100 bp. Equities are now looking completely overpriced relative to credit.

JPMorgan blended corporate investment grade spread

Update: some are questioning Bloomberg's estimated PE number. Here is an estimate from S&P as a comparison (consistent with Bloomberg's estimate of 16) - see page -2:

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