What’s the deal with valuations?

We feel like Jerry Seinfeld right now, but we’re not the only ones. During the early-August selloff, investors weren’t just panicking over July’s surprisingly rough jobs numbers—they were also worried that big tech’s spending on AI won’t deliver big-enough profits.

Are some stocks overvalued? To get a handle on how valuations are trending, we asked an M&A adviser and a money manager to share what they’re seeing. But first, let’s set the stage.

Where we’ve been. For more than a dozen years, the price-to-earnings (P/E) ratio of the S&P 500 has generally been on an upward march. But soon, major indices might find that multiple heading in the opposite direction. P/E ratios for the S&P 500, Nasdaq 100, Dow Jones Industrial Average, and the Russell 2000 are each projected to fall in the next year, according to Aug. 9 data from Birinyi Associates, the Wall Street Journal reported.

Downhill from here? Chris Bloomstran, money manager and founder of Semper Augustus Investments told CFO Brew that he believes valuations hit a secular peak in 2021 and that it’s a matter of time before the market responds with a slowdown. The recovery of earnings multiples after a 2022 selloff have been limited to the 50 or 60 largest companies, he said, and in many cases their resurgent valuations aren’t justified given their falling revenue growth and, in some cases, the likelihood that their profit margins will narrow.

For more on valuation trends, click here.—GD

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The stern-parent vibes keep coming from the Public Company Accounting Oversight Board (PCAOB), which found deficiencies in nearly half of the audit engagements it inspected last year, the auditor watchdog reported last week. But not all the stats were sobering, and there were even glimpses of improvement among the Big Four.

Investigators looked at 230 engagements from Big Four firms in 2023, found that the overall deficiency rate has started to “level off,” and that some (relatively) smaller firms had fewer dings against them than in 2022’s report. For all the improvement, 46% of all engagements had at least one serious lapse, or I.A deficiency. Lapses have now increased three years in a row.

“These inspection results point to some small signs of movement in the right direction,” Chair Erica Williams said in a press release. “Still, overall deficiency rates are unacceptable.”

Big ups. The Big Four’s record on I.A deficiencies was more encouraging than the overall number. Their combined share of inspected audits with one I.A deficiency remained at 26% for the second year running, and their share of audits with more than one of the deficiencies fell (one percentage point) to 20%. The board had fewer quality control criticisms of the firms “for the first time in three years,” it reported.

Click here to see how the Big Four are doing on audits.—GD

Walmart may have found the key to success in a lukewarm economy: offering consumers lower prices and greater choice (with a bit of help from AI).

The retailer posted strong earnings for Q2, reporting 4.8% revenue growth year over year. It saw same-store sales growth of 4.2% year over year in the US, during a period when other retailers saw average comp growth of 2.8%. After the earnings report came out, Walmart overtook Costco to become the best-performing retailer on the S&P 500, according to the Wall Street Journal.

The retail giant hasn’t seen “any additional fraying of consumer health,” its CFO, John David Rainey, said during an earnings call. “Customers continue to be discerning and choiceful, looking for value to maximize their budgets, while leaning into seasonal celebrations,” he said.

Lowering prices appears to have paid off for Walmart. The chain made more than 7,200 price cuts in the US, CEO Doug McMillon said, noting that “for the quarter, both Walmart US and Sam’s Club US were slightly deflationary overall.”

Watch out, Amazon: Walmart’s US e-commerce business rose 22% in the quarter, and AI’s a big reason why. The company used generative AI to “populate the attributes and the characteristics of hundreds of millions of items” on its site, John Furner, president and CEO of Walmart US, said. It would have taken 100 times longer to do so manually, he estimated.

For more, click here.—CV