Brown on The Valuation Debate

Are stocks overvalued and headed for a crash? Josh Brown of Ritholtz Wealth Management and The Reformed Broker blog doesn’t think so.

While many have pointed to the fact that the 10-year cyclically adjusted price/earnings ratio is well above its historical average as evidence of the market’s overvaluation, Brown questions that metric’s efficacy. “I … take issue with this idea that a cyclically adjusted P/E ratio is the end-all be-all and can actually predict anything inside of a decade,” Brown tells Yahoo! Finance’s Henry Blodget, adding, “I think it [unnecessarily] scares the heck out of investors.”

Brown and Blodget talk about some other valuation issues, including whether profit margins that are near all time highs are skewing P/E ratios. Brown says that margins have been trending higher for two decades, and for good reason. While the economy used to be focused on low margin manufacturing firms, today tech firms — which tend to inherently have lower margins — have become a sizeable part of the economy. Given that, he thinks margins might not be as out of line as many are contending.

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