“Earnings can be manipulated through charges, etc. However, sales are sales. Unless the company is outright lying, you cannot play with sales numbers,” Maley said. “When the price-to-sales number is sitting at basically the same level it did at the tech bubble high, it’s very hard to say that the stock market is approaching ‘fair value.’”
Another worrying chart compares share prices against physical assets. With the S&P 500 trading about 12 times its tangible book value, the multiple is roughly 30% above what it was during the internet-bubble peak.
While higher than other indicators, it’s also easier to explain away in an era when investors place a premium on intellectual property and less emphasis on plants and equipment. The trend accelerated during the pandemic lockdowns, when factories were shut down and consumers shifted their spending online, sending intangible-heavy firms skyrocketing.
Has sentiment been washed out to signal a bottom? Probably not, according to Chris Verrone, head of technical analysis at Strategas Securities who studied past routs and found that a floor usually forms after the largest stocks succumb to panic selling.
During the carnage last week, trading in Apple Inc. shares was subdued. With a P/E ratio of 21, the stock was valued above the multiple of 18 it fetched at the end of the 2020 crash and the reading of 12 after the 2018 selloff.
“In 2008 it was Exxon and Walmart where volumes surged in the final innings of the decline, and in 2002 it was Cisco,” Verrone wrote in a note to clients. “It hasn’t happened today with Apple, yet.”
Yet bargains have started to surface in some corners of the market, such as smaller firms. Take the S&P Midcap 400 Index. At 13.9 times profits, the index trades at a multiple that is close to the lows reached during the pandemic crash and the 2008-2009 financial crisis.
The same is also true for the S&P Smallcap 600 Index, whose P/E at 13.5 now is cheaper than any time since 2009. And after trailing large-caps for four straight quarters, small-caps have outperformed since March.
“The idea that small caps may already be reflecting a recession and appear to be stabilizing relative to large caps is something all investors should take note of,” said Lori Calvasina, head of US equity strategy at RBC Capital Markets LLC. “Small caps are often viewed as pure plays on the domestic economy and tend to be viewed as leading indicators.”
This article was provided by Bloomberg News.