Capital Markets Autumn 2020

III

More than Meets the Eye Valuation

• Companies are increasingly investing more in intangible assets (e.g., R&D), that are expensed rather than capitalized

• The result is depressed earnings relative to free cash flow, making the stock market look cheaper on free cash flow than earnings

I

II

Intangible vs. Tangible Investment

S&P 500 Valuation Relative to Past 25-Year Median

Intangible

Tangible

III

41%

90%

70%

IV

50%

-7%

30%

V

Share of U.S. Investment

10%

Price-to-Earnings

Price-to-Free Cash Flow

1980

1985

1990

1995

2000

2005

2010

2015

2020

VI

Source: Share of U.S. investment is based on gross private nonresidential domestic investment from the Bureau of Economic Analysis. Valuation is from FactSet as of 09/30/2020 with price-to-earnings being the current market price of a company divided by its last 12 months of earnings. Price-to-free cash flow is the current price of a company divided by its last 12 months of free cash flow.

17