Summary
We have several ways of looking at market valuations, and most are signaling that stocks are reasonably valued, though hardly a bargain. Still, equity valuations are improving as stocks sell off in response to the fighting in Iran. Our Stock Bond Barometer asset-allocation model is indicating that the two major portfolio asset classes are near parity as far as valuation is concerned. This model is our most comprehensive and goes back to 1960. The output is expressed in terms of standard deviations to the mean, or sigma. The mean reading is a modest premium for stocks, of 0.18 sigma, with a standard deviation of 1.07. In other words, stocks normally sell for a slight premium valuation compared to bonds, which has been the case since inflation and bond yields jumped in 2022. The valuation level now is a 0.33 sigma premium for stocks, not a discount but easily within the normal range. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is approximately 21, within the normal range of 15-24. On price/book, it is no surprise that stocks are priced at the high end of the historical range of 5.5-1.8, given that tech stocks, with low capital bases, are the biggest component of the market. Meanwhile, the current S&P 500 dividend yield of 1.11% is below the historical average of 2.9%, but the relative reading to the 10-year Treasury bond yield is 28% compared to the long-run average of 39%. On price/sales, the current ratio of 3.3 is above the historical average of 1.8, but wel
