Here is the latest value spread update for July from Validea’s market valuation tool. Instead of focusing on market cap weighted indexes like the S&P 500, our tool focuses on the valuation of the average stock compared to history. To do the calculation, we use the median of our investable universe of 2700 stocks. To compare value and growth, we look at the top decile of cheapest stocks and compare it to the top decile of most expensive stocks.
Despite the recent market pullback, value stocks have become slightly more expensive relative to growth stocks in July. They are currently in the 25th percentile of TTM P/E, meaning they have historically been cheaper 25% of the time. Despite the increase, value stocks still appear cheap relative to growth stocks on a historical basis.
Using the current year earnings estimate yields similar results. Value got a bit more expensive in July due to its strong run, but is still cheap by historical standards.
The range based on the price-to-sales ratio also paints a similar picture. In relative terms, the value is in the 32nd percentile compared to growth. In absolute terms, it is more expensive with the price-to-sales ratio than with the other metrics. This is because profit margins are high compared to the past.
Value spreads are not useful indicators when it comes to predicting short-term market movements, but they can provide interesting information for long-term investors who want to put current conditions into historical context.
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