Stocks in the U.S. have become expensive enough relative to sales that their valuation may curtail any gains, according to Jack Ablin, chief investment officer at BMO Private Bank.
The attached chart displays the Standard & Poor’s 500 Index’s price-to-sales ratio, which Ablin cited in a July 8 report. Yesterday’s reading was 1.84 times sales, just below a peak of 1.87 times when the S&P 500 set a record on May 21. The earlier ratio was the highest since February 2001.
“While valuation is not a market-timing tool, it does represent one of the most serious headwinds investors face this year,” Ablin wrote. The Chicago-based investor also referred to the potential for lower revenue and earnings.
S&P 500 sales dropped 4.3 percent in the second quarter, according to analyst estimates compiled by Bloomberg. The projected decline reflects falling revenue at commodity producers and industrial companies. First-quarter sales for the S&P 500 slid 3 percent, the biggest retreat since 2009.
Profit slumped 6.4 percent last quarter for the index’s companies, according to analysts. To be sure, they mistakenly predicted falling S&P 500 earnings five other times since 2009. In the first quarter, a projected 5.8 percent decline when the period ended wound up as a 0.7 percent increase.
Stock repurchases contributed to the earnings-per-share growth, Ablin wrote, though he added that they aren’t always in shareholders’ best interest. As he put it: “Buybacks are often indicative of short-term thinking, akin in some cases to feasting on Twinkies in preparation for a marathon.”