Investors who are cautious on US equities today are quick to point to the CAPE, or Shiller P/E, as clear evidence of an overvalued stock market. Market bulls prefer to look forward and the promise of strong earnings, and they've been richly rewarded for their optimism over the past two years.
How accurately does the stock market discount the value of a business based on future streams of actual net income, plus an estimate of terminal value? Dell provides a real-world example.
With the Shiller P/E for the S&P 500 currently standing at a 21.5 (approximately 30% higher than its long-term average), many value investors, including Cliff Asness of AQR Capital Management, have adopted a cautious stance toward US stocks.
In a recently published paper, noted valuation authority Aswath Damodaran examines the discipline of growth investing and, in so doing, challenges the notion that growth investors are simply risk seekers who ignore valuation.
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