Don't Buy Stocks Right Now

The index's gains aren't coming from earnings and dividends.
By Kinsey Grant ,

The S&P 500's price to earnings ratio and profit margins are cause to "just say no" to investing in the index, according to Grantham, Mayo, Van Otterloo & Co analysts.

James Montier and Matt Kadnar released a report Wednesday titled "The S&P 500? Just Say No" in which they point to the index's heavy reliance on price to earnings ratios and profit margins instead of growth indicators such as earnings and dividends to keep climbing.

The S&P 500's P/E ratio rose as high as 22 this year from 12.2 in October of 2011. Gross margin inched up to 34.3% of revenue to match a peak from December of 1999. These are what drives the index upward, according to the analysts.

Expecting the index's valuation and profitability to continue climbing is "an extremely dangerous assumption," Montier and Kadnar wrote. "If extraordinary fundamental growth is what you are relying upon to justify owning your S&P 500 index fund today, well...good luck to you," the note read. 

The S&P 500 finished Tuesday slightly down 0.05% after tallying its best gains this summer on Monday. The index has gained 10% since the start of the year.

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