Subject: Re: OT: S&P versus T-Bills?
What are your latest thoughts on RSP and QQQE?
Per the official RSP site, as of 6/30/24, trailing P/E = 17.99 and forward P/E = 16.45 which looks reasonable relative to SPY.
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In 2022 and 2023, you recommended buying QQQE when prices were much lower. That was an excellent call! Per your post below, you said "fair value is 68 and today's price of 70.56 is not cheap but reasonable". You also said "This sort of valuation exercise certainly won't have you putting your money into the S&P 500 these days, whether cap weight or equal weight."

My comments about those two are that they are great for very long term holds. When I mentioned it, it was a fair entry point for QQQE, less so for RSP. The fact that they've both done well since then could be, in the context of my suggestion, considered just a random blip in a long run trajectory.

The thesis is primarily this: the earnings trajectory for QQQE has been VERY much faster than the earnings trajectory of RSP, for decades. This might not continue, but if it does, that means that it is by far the better very long term hold. Particularly if you don't enter at a worse-than-typical valuation level.

That says relatively little about the short and even medium term. As for RSP's valuation seeming reasonable based on the quoted P/E, I wouldn't put much weight on that. Earnings are cyclical. If you do a cyclical adjustment on earnings it's not such a pretty sight. And if you look at other metrics like price-to-sales that implicitly assume mean reversion of net margins, it looks downright dire. Earnings have risen far, far, far more than sales for a long time. This process can go on only so long, and we seem to be getting a lot closer to the high end limit of net margins than to the low end. And net margins could reverse, both cyclically and in a secular way...who knows?

But if you do want to have a grasp of the likely valuation level of RSP in the current cycle (not to be confused with its true long run value), I will let you in on a wonderful little metric I came up with. Since RSP (and QQQE for that matter) are both equally weighted, the median of any metric is a very good proxy for the average, while neatly avoiding distortions from a few wild outliers. Track down the median free cash flow yield among the S&P 500 companies, and divide by 3.00%, being the typical multiple assigned by the market since 2008. That will get you the likely trading value of RSP, not to be confused with its true fair value versus long run sensible expectations. Using that method (and only that method), RSP is around 10.8% more expensive than usual using "right now" median FCF yield, and about 6.8% more expensive than usual measuring the price against the on trend real median FCF. Using those two methods, you might expect a price of maybe $148-154 this month, versus the current price of $164.35. Again, not to be confused with an estimate actual fair value, this is merely with reference to what one would expect it to be trading at, given the recent very high free cash flow yields. If/when median free cash flow rolls over, the market value might well do so as well. Actual fair value is, in effect, the present value of all future earnings. The cyclically adjusted earnings yield is poorer than average, even if you look only at the high-valuation era since the millennium.

Jim