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Kass: Are Valuations Peaking?

Stocks in this article: SPY

This means that the billion-dollar question is to figure out whether the market's P/E can continue to expand or whether it is peaking.

The S&P 500 closed on Tuesday at 1670. Based on earnings of about $104 a share, the S&P now trades at 16x forward earnings vs. a long-term average of 15x over the past five decades.

When S&P profits are about to peak (my baseline expectation), however, the forward P/E multiple has averaged closer to 14.5x.

I have argued (and continue to advance the notion from an analytical standpoint) that given that profit margins are near 58-year highs and well above (by nearly 75%) their historic trend line and in light of the tepid top-line growth anticipated (mentioned previously), indeed S&P profits are peak-like today.

In conclusion, the market's valuation (P/E ratio) appears very stretched given historical earnings relationships, peak-like S&P profits and vulnerable profit margins.

While my outlook has been wrong-footed since February, I continue to be of the view that the market's risk/reward is unattractive at current prices.

At the time of publication, Kass and/or his funds were short SPY, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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