Chart of the Week - Vertiginous Valuations
- Callum Thomas
- Mar 30, 2022
- 1 min read
Valuation Cohorts — The Upper Reaches of Expensiveness: This chart presents the price to book ratio picture across the industries/sub-industries that comprise the S&P500. As you can see, the Upper Quartile of industries are trading at price to book ratios *higher* than that seen during the dot com bubble, and this is despite a (minor) reset. Even the Lower Quartile is at the upper end of the range, and last but not least: the Median is well above that ever seen in recent history.
This has left a yawning relative value gap between the cheaper end of the market vs the more expensive end of the market (aka value vs growth). It’s valuation charts like this that really show what’s at stake if we end up in a situation of runaway inflation, a rapid tightening of financial conditions/monetary policy, and potential subsequent economic slowdown.
Sooner or later the excesses on display in this chart will need to be resolved one way or another. This is one reason why value vs growth is an attractive proposition from a relative standpoint, but as always we should note that value stocks could end up outperforming growth stocks simply by losing less vs the more expensive parts of the market…
Key point: The most expensive part of the market is more expensive than usual.
NOTE: this post first appeared on our NEW Substack: https://topdowncharts.substack.com/
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Callum Thomas
Head of Research and Founder of Topdown Charts
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The cohort framing is useful because it highlights how “the median” can be elevated even if only a slice of the market is truly frothy — which makes index-level comfort a bit misleading. I also wonder how much the cheap cohort is “cheap for a reason” (cyclicals, balance sheet risk) versus genuinely mispriced. This whole value/growth split feels like choosing between optionality and durability — sort of like the tradeoffs I end up making when messing around on StyleLookLab and realizing the bold look isn’t always the most wearable.
That “sooner or later it gets resolved” line is basically the uncomfortable truth — either fundamentals catch up, or multiples come down, or you get some combo via inflation/discount rates. I’d be interested to see the same chart but adjusted for buyback-driven shrinkage in equity (since that can mechanically boost P/B). Random tangent: the phrase “vertiginous valuations” made me think of those dreamy ghibli ai filters — beautiful, but you can lose your footing if you stare too long.
The line about “value can outperform by losing less” is the part I keep coming back to — it’s not about calling a big rally in cheap stuff, it’s about where the valuation air pockets are if macro gets ugly. Do you track this cohort view alongside earnings revision breadth? Also, I stumbled on this site when looking up random tools, and it’s funny how the market’s “discovery” process works the same way: attention clusters, then prices follow.
Curious if you’ve looked at how much of the “upper quartile” is being pulled up by a handful of sectors with structurally low book values (software/semis) versus a broad-based richness across industries. I’ve seen people treat these cohort charts like a bell curve story, but the tails matter a lot. Kind of like when you plug numbers into a grading bell curve calculator and realize one tiny assumption moves the whole distribution.
The “value vs growth” gap here feels less like a simple style call and more like a bet on whether discount rates stay higher for longer. If inflation re-accelerates, the expensive cohort doesn’t just mean-revert — it can de-rate fast. Weirdly, this kind of regime shift stress reminds me of how quickly you can go from cruising to stuck when you misplace one block in https://blockblast.co.