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StockMarketAgent
Methodology · Valuation dispersion

Valuation dispersion map

A cross-sectional plot of valuation multiples against quality and growth used to characterize whether the market is pricing a narrow leadership cohort or paying for fundamentals broadly.

Specification

Valuation dispersion map — operational spec

Quantifies the spread of valuation multiples across the index. Compressed dispersion is a late-cycle marker; decoupling between valuation and quality is the model's most important alarm.

Inputs
  • Forward P/E, EV/EBIT, and P/B for every constituent (consensus, monthly snapshot)
  • Trailing 5-year mean ROIC for every constituent
  • 3-year forward EPS growth rate (consensus, monthly)
  • Index membership and float-adjusted weights at the snapshot date
Computation
  • For each multiple, compute the 10th / 50th / 90th percentile across constituents.
  • Dispersion = 90th percentile minus 10th percentile, expressed as a multiple of the median.
  • The dispersion metric is converted to a percentile rank against its own multi-decade history.
  • Each constituent is plotted on a (valuation multiple) × (ROIC) plane and a (valuation multiple) × (forward growth) plane.
  • A decoupling flag is raised when the highest-multiple cohort no longer overlaps with the highest-ROIC cohort.
Outputs
  • Dispersion percentile rank (0-100) for forward P/E, EV/EBIT, and P/B.
  • Two scatter plots: valuation × quality and valuation × growth.
  • Decoupling flag (boolean) and the magnitude of the decoupling.
Limitations
  • Index composition changes over time; the percentile rank silently incorporates survivorship bias.
  • Forward growth and forward P/E inherit sell-side estimate noise.
  • REITs, banks, and other capital-structure-distinct cohorts distort the index-wide read; the model publishes a financials-and-REITs-stripped variant alongside the headline.

Frequently asked

Why does compressed dispersion matter?
Compressed dispersion (a tight 10-90 spread on forward P/E) indicates the market is pricing a uniform outcome. Historically, that has been a marker of late-cycle complacency and is associated with elevated drawdown risk over the following 12 months.
What does the decoupling flag actually signal?
The flag fires when the cohort with the highest valuation multiples is no longer the cohort with the highest ROIC. That tells you investors are paying premium multiples for something other than capital-allocation quality — typically narrative, momentum, or scarcity — which historically reverses sharply.
Why a financials-and-REITs-stripped variant?
Banks and REITs have capital structures that make P/E and EV/EBIT misleading at the cross-section. Stripping them produces a cleaner read on the operating-company core of the index. Both versions are published so the reader can choose.
See the full methodology hub for the rest of the model registry, or open the glossary entry for the headline definition.