Barron’s Letter to the Editor on Stock Market Valuation

Barron’s published my Letter:

Sustainable Returns

To the Editor:
Jack Hough states that stocks are now expensive since the S&P 500 index has recently traded at 23.7 times trailing operating earnings, compared with a 35-year average of 19 times (“The Stock Market Is Priced for Middling Returns From Here On,” Streetwise, Sept. 17). However, since asset prices are inversely related to interest rates, it’s important to note that the current interest rate on the 30-year Treasury bond of 4.1% compares favorably to its average of 6.4% since 1977. Furthermore, valuation comparisons should also consider the role of return on invested capital in determining multiples. ROIC greater than the cost of capital, growth, and sustainability of returns is an important value driver. The seven largest companies by market capitalization, representing a historically high 25% to 30% of the total market cap of the S&P 500, satisfy the last criteria for higher valuations.

David I. Kass
College Park, Md.