ASX Remains Overvalued and at the Whim of Interest Rates

Wide-moat-rated ASX Limited’s share price continues to shoot higher and is up 55% over the past two years. However, we attribute share price growth more to falling interest rates than a material improvement in ASX’s earnings growth outlook. Over the past decade, ASX has generated an EPS CAGR of just 1.9% and we forecast an EPS CAGR of only 4.4% over the next decade. The combination of a rising share price and largely unchanged EPS forecasts has been an expansion in ASX’s one-year forward price/earnings ratio from 23 to 33 or, looked at another way, the EPS yield has contracted from 4.3% to 3.0%. However, at the current share price, we think investors are settling for investment returns which are too low, and we continue to believe the stock is materially overvalued relative to our AUD 52.00 fair value estimate.