SPY - Embedded Expectations Analysis - 2018 03 28
ï€ The SPY currently trades at levels relative to UAFRS-based (Uniform) Earnings not seen since 2001, with a 23.7x Uniform P/E (V/E'). Expectations initially appear high, with the market expecting Uniform ROA (ROA') to sustain at forecasted peak 28% levels, with 6% Uniform Asset growth (Asset' growth), however upon deeper review, expectations do not appear unreasonableï€ S&P companies have consistently improved ROA' every year since 2002, seeing ROA' rise from 13% then, to 26% in 2016, and forecast to reach 28% in 2018. As such, market expectations for flat ROA' beyond 28% does not appear overly aggressive. If the companies can continue the historical trend, there could be further equity upside. Also, 6% Asset' growth has been roughly average since 2009, so expectations for this to continue do not appear unreasonable
ï€ Valens Market Phase Cycle analysis highlights reasons to think that current valuations are not too aggressive. Corporate management teams are growing more confident about investing in growth, implying Asset' growth may exceed recent historical averages. Also, there are no significant credit headwalls or risks for a credit freeze that could negatively impact corporate profitability sustainability, and declining corporate tax rates should boost earnings. Finally, while valuations appear high relative to the past 15 years, there are specific factors, such as currently low inflation and investor tax rates, that warrant higher-than-normal valuations
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