r/valueinvesting
A 4% interest savings account could be better value than the S&P 500
S&P 500 is overvalued at a 25 P/E with slow GDP growth, making a 4% savings account a better bet as AI expectations are priced in.
- S&P 500 forward P/E is 25, double the historical average, and Shiller CAPE is near 2000 bubble peaks.
- US GDP growth is expected to be only 1-2% above inflation, historically correlating with lower market returns.
- Current valuations rely on speculative AI revenue projections that are already priced in and likely to disappoint.
A 4% interest savings account has an equivalent P/E of 25
The S&P 500 forward P/E is around 25
The historic return on the S&P 500 has been about 10% per year. But things are different: P/E is now double the historical average. Shiller CAPE is more than double the historical average and is almost at the 2000 bubble peak.
This would be fine if the US economy was growing fast but it's not. Growth is expected to bearound 1-2% above inflation.. Over periods of 15 to 20 years, the correlation between GDP and the S&P 500 has an R² of around 0.95. This is linked to the Buffet Indicator which itself suggests the stock market is more overpriced than ever before.
Based on these indicators and historical patterns, the S&P 500 is likely to grow at less than 4% a year over the next five years.
Current share prices are very speculative based on projections of rapidly increasing revenue and profit margins for the biggest companies due to AI. That's a big risk considering these projections are already priced in. Companies have an incentive to overstate and oversell the AI future. With expectations so high, people should prepare to be disappointed.
"A 4% interest savings account has an equivalent P/E of 25"
No it's not. That metric makes no sense on a saving account.
What part about 4% doesn't make sense to you?
Do you not understand what it means?
P/E of 25 is a 4% earnings yield
Yeah wtf does the interest rate on a CD or treasury have to do with the price earnings ratio of a company
ITT people who have no understanding of the relationship of P/E to growth expectations.
Lmaooooo
Been hearing about this for ten years.
keep it under your mattress at this point
Quit smoking
P/E is not a metric of return.
Earnings means return. Price means investment. Therefore it is a metric of return on investment.
Certainly this is a clown 🤡 statement with a clown 🤡 idea 💡. Perhaps you need to read a book or take a course or go to college.
I dont take advice from clowns.
Totally. Yet they have courage and audacity of experts
I am personally building more of a cash stockpile than usual but there are still plenty of individual stocks out there that can beat a 4% return easy.
That's literally all a savings account does
Over the next 10-12 years? IMO likely, given the correlations of subsequent historical returns to valuation, current US large cap valuations, and the more hawkish tone than anticipated from this Fed.
That said, there's currently so much liquidity sloshing about that it will find its way to other more prospective investment classes. Emerging markets, commodities and their producers, etc. There were sectors that did great from 1968-1982, and from 2000-2009, when the S&P lost 62% and 56% of its inflation adjusted value respectively (Real total returns weren't quite that bad in 1968-82 as the S&P 500 offered a 3% dividend yield. At the 2000 peak as now, yields hover just above 1%.)
A return of a stockpicker's market suits me just fine. I do better in them, and a comeuppance for momentum chasers would cheer me. That said, nearly every stock, even the undervalued ones, are trounced in the initial stages of a bubble pop, so I'm following Berkshire's lead in raising cash in SGOV, for optionality. Given the margin debt supporting this market, we could be in for quite the rollercoaster.
After so many years of outsized gains, why not? I’m getting the feeling this AI hype will need to cool off soon, and there’s literally nothing else to hang your hat on once that takes a breath.
The warning signs are everywhere you look. If the market gets a reality check, the \\bull market forever\\ echo chamber will be replaced by an equally snarky \\of course you were delusional\\ echo chamber.