Taps Coogan – July 6th, 2021

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As the following chart from Liz Ann Sonders attests to, the average S&P 500 price-to-sales ratio has been roughly 1.5 since 1990. For the last five years, that ratio has risen to an average of 2.26. As of June 28th, it is sitting at 3.12.

Investors are paying twice as much for a unit of revenue as they have on average since 1990 and 38% more than the average of the last five years.

With everything in the fixed income world including junk bonds now sporting negative real yields, it’s not exactly a surprise that stock valuations are through the roof.

In the long run, investors are supposed to make money by providing scarce capital to people willing to pay for it. When the world is awash in ever-expanding quantities of money chasing financial assets, any individual’s contribution of capital becomes essentially worthless. Hence, we have negative real returns on bonds and ridiculous valuation premiums for stocks. Sure, money can be made chasing those trends, just don’t forget what you are really betting on.

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