Stock Market Hits Fresh Milestones as Valuations Rise
Stock Market Milestones
The stock market has hit a new milestone as the S&P 500 broke above the 5,000 level for the first time. However, along with this surge, its valuation is also reaching new heights.
The S&P 500’s forward price-to-earnings ratio rose to 20.4 times, a level last reached in February 2022, far above the index’s historic average of 15.7, according to LSEG Datastream.
While some investors see the growing multiple as making buying into the broad market less enticing, others believe that stocks can remain expensive for an extended period.
Impact of Treasury Yields
Stock valuations have risen even as Treasury yields have rebounded this year, following a rethink of how soon the U.S. Federal Reserve will begin cutting interest rates.
Optimistic Earnings Outlook
While a more optimistic earnings outlook would help make valuations less expensive, profit expectations for 2024 have largely stayed stable this earnings season as companies have reported results.
High valuations have preceded periods of subpar performance in the past, according to research from Evercore ISI. However, valuations are still below the peak at the Y2K Bubble Top.
Impact of Megacap Stocks
The S&P 500’s valuation is skewed by the heavy weighting of the index’s largest stocks, such as Apple, Microsoft, and Nvidia, which have a combined weighting of 29% in the index and trade at an average of 34 times earnings.
Assessment of Overvaluation
An analysis by Ned Davis Research showed that the S&P 500 is more than 5% “overvalued,” when adjusted for how the index’s P/E ratio has trended since 1964. However, the index is “far from bubble territory,” the firm said.
There have been fewer signs of the speculative excesses that marked past market turning points, such as the dot-com era and the wild post-pandemic rally that brought eye-watering gains in so-called meme stocks such as GameStop.
While the stock market continues to hit fresh milestones, the rising valuations and potential implications for future performance are capturing the attention of investors and analysts alike.