CNBC: 'Nightmare' U.S. Stock Valuations Driven by 'Young, Dumb' Investors, Fund Manager Says

October 15, 2020

Article by Elliot Smith in CNBC

U.S. equity valuations have become a “total nightmare” fueled by “young and dumb” investors, according to Cole Smead, president and portfolio manager at Smead Capital Management.

At present, investors are paying 22 times forward earnings to purchase stocks on the S&P 500, 50% higher than the 10-year average valuations across the index.

The forward price-to-earnings (P/E) ratio divides the current share price of a company by its estimated future earnings per share (EPS).

Much of the market rally which took the U.S. benchmark from correction territory in March to an all-time high in August was driven by tech megastocks and a bullish options market.

“The buying that went on in August and September is a 10-year phenomenon the likes of which we have never seen, among millennials and in the risk-taking among people that don’t want to own bonds and want to own overpriced U.S. quality businesses, it is of record proportions,” Smead told CNBC’s “Squawk Box Europe” on Thursday.

He added that current valuations were an example of “stock market failure” driven by millennials speculating in the stock market for the first time. Smead projected that markets could be in for a nosedive since despite its monetary policy shoring up credit markets, the Federal Reserve “can’t save a stock market.”

“They are buying bullish call options that expire inside two weeks. There was ...

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