{"id":8737,"date":"2020-07-14T18:19:18","date_gmt":"2020-07-14T18:19:18","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=8737"},"modified":"2022-02-26T13:06:34","modified_gmt":"2022-02-26T13:06:34","slug":"is-the-stock-market-overvalued","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/is-the-stock-market-overvalued\/","title":{"rendered":"Is the Stock Market Overvalued?"},"content":{"rendered":"\n<p>In recent columns, I have written extensively about the\nseeming \u2018disconnect\u2019 between the economic recovery (weak) and the stock market\n(strong). I won\u2019t rehash those arguments here, but the overarching takeaway is\nthat the stock market almost always moves <em>well\nin advance <\/em>of an economic and earnings recovery. If an economic recovery is\nexpected to pick up steam twelve months from now, the stock market is likely to\nmake its move today. In my view, that\u2019s what we\u2019re seeing right now.<\/p>\n\n\n\n<p>An investor who accepts this argument may also wonder when\nthe stock market is <em>over-<\/em>pricing a\nrecovery. Or, simply put, when does the stock market become overvalued relative\nto future earnings and growth?<\/p>\n\n\n\n<p>Many would say the stock market is already overvalued. On\nJune 30, the forward P\/E on the S&amp;P 500 was 21.7x, which is considerably\nhigher than the 10-year average of 15.1x. In fact, the S&amp;P 500 has not\ntraded at this high of a multiple since the late 1990\u2019s, in the run-up to the\ntech bubble.<sup>1<\/sup> Does this mean we\u2019re in another period of \u201cirrational\nexuberance\u201d? I do not believe so, for four reasons.<\/p>\n\n\n\n<p>________________________________________________________________________<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2020_7_13&amp;content=stock_market_outlook_report\">In Times Like These, Focusing on Data and Not Media Hysteria is Key!<\/a><\/strong><br> \u00a0<br> We have past the middle of 2020, and it has been a chaotic year of events to say the least. Still there is money to be made. So instead of focusing on the \u201cwhat if\u2019s\u201d that saturate the media, I recommend staying calm and focusing on the fundamentals. To help you do this, I am offering all readers our just-released Stock Market Outlook report. This report contains some of our key forecasts to consider such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>S&amp;P 500 yearend targets<\/li><li>Is it time to buy stocks?<\/li><li>What should you think about\n\u2018unbelievable\u2019 jobs data?<\/li><li>International outlook<\/li><li>Zacks Rank S&amp;P 500 sector picks<\/li><li>Impacts of Coronavirus<\/li><li>And much more<em><\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!\u00a0<br> <\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2020_7_13&amp;content=stock_market_outlook_report\">IT&#8217;S FREE. Download the Just-Released August 2020 Stock Market Outlook<\/a><sup><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2020_7_13&amp;content=stock_market_outlook_report\">2<\/a><\/sup><\/strong><\/p>\n\n\n\n<p>________________________________________________________________________<\/p>\n\n\n\n<p><strong>1 &#8211; The Fed Model Suggests Stocks Can Go Higher<\/strong><\/p>\n\n\n\n<p>Without getting too into-the-weeds, the Fed model is a way\nof valuing the stock market that compares the forward earnings yield (the\ninverse of the P\/E ratio) of the stock market with the 10-year U.S. Treasury\nbond. <\/p>\n\n\n\n<p>For illustrative purposes, let\u2019s say the yield on the\n10-year U.S. Treasury bond is 5%, and the forward earnings yield on the S&amp;P\n500 is 6%. In this case, an investor might do better with stocks, but may\nultimately decide that the 1% difference is not worth the additional risk. If\nthe yield on the 10-year Treasury is 1% and the earnings yield on the S&amp;P\n500 is 5%, investors usually choose stocks. <\/p>\n\n\n\n<p>Today, the forward earnings yield of the S&amp;P 500 is over\n4%,<sup>3<\/sup> and the 10-year U.S. Treasury bond closed the second quarter\nwith a yield of 0.66%.<sup>4<\/sup> When extra liquidity is looking for a place\nto go, and the choice is between stocks and bonds, stocks look far more\nattractive on a relative basis. <\/p>\n\n\n\n<p>What\u2019s more, all signs also point to the Federal Reserve repeating its post-2008 Financial Crisis playbook of leaving the federal funds rate near the zero bound for at least a few years. Historically, a forward P\/E of 18x or 20x on the S&amp;P 500 was viewed as fairly expensive, but at the same time, interest rates never been this low for this long. It was once outlandish to think the S&amp;P 500 could trade at 25x forward earnings, but with the current interest rate outlook, it feels more possible than unlikely, in my view. <\/p>\n\n\n\n<p><strong>2 &#8211; Tech Companies Make Money \u2013 Lots of It<\/strong><\/p>\n\n\n\n<p>The last time the S&amp;P 500 traded over 20x forward earnings for a sustained period was 1997 \u2013 1999, with the index topping out at around 25x.<sup>5<\/sup> But looking back, we now know there were basically no earnings supporting tech\u2019s astronomical rise. Today, tech companies are leading the way with sales growth, earnings growth, and arguably reshaping the modern economy as we know it in the process. The pandemic is accelerating these changes, in my view. Not the other way around.<\/p>\n\n\n\n<p><strong>3 &#8211; The Very Worst of the Crisis is Behind Us<\/strong><\/p>\n\n\n\n<p>Cases of Covid-19 are rising, so there is no argument to say\nthat the spread of the pandemic is improving. What has changed between April\nand today, however, is a better understanding of how to test, treat, and care\nfor patients who become infected. There are also more hospital beds and medical\nsupplies available to handle case surges. <\/p>\n\n\n\n<p>From an economic standpoint, I agree that the longer this crisis drags on, the longer and more difficult the economic road to recovery will be. But at the end of the day, recessions end when economic growth begins \u2013 even if that growth is merely a trickle at first. In my view, the very worst of the economic crisis is behind us, and markets are looking ahead to what the economy could look like at this time next year. <\/p>\n\n\n\n<p><strong>4 &#8211; You Really Cannot Fight the Fed and Fiscal Stimulus<\/strong><\/p>\n\n\n\n<p>The world has never seen this type of liquidity event before.<\/p>\n\n\n\n<p>Drawing from lessons of past crises, the Federal Reserve and\nCongress acted quickly and decisively with extraordinary stimulus measures. This\nstimulus is not unique to the United States, either. Developed countries around\nthe world and China are pulling the monetary and fiscal levers too, with total\nfiscal and monetary stimulus now amounting to approximately <em>28% of world GDP<\/em>.&nbsp; When money supply growth exceeds nominal GDP\ngrowth, as is presently the case (by a long shot), this liquidity flows through\nthe capital markets\u2014pushing asset prices higher in the process, in my view.<sup>6<\/sup><\/p>\n\n\n\n<p>The stimulus may increase from here. In a congressional\nhearing at the end of June, Federal Reserve Chairman Jerome Powell and Treasury\nSecretary Steven Mnuchin both pledged to consider additional relief measures to\nsupport the economy as the pandemic drags on. It is difficult to make a bearish\ncase when this \u2018wall of liquidity\u2019 looms in the backdrop. <\/p>\n\n\n\n<p><strong>Bottom Line for\nInvestors <\/strong><\/p>\n\n\n\n<p>Considering the four reasons detailed above, in my view it\nis not outlandish to imagine a scenario where the S&amp;P 500 trades at 23x,\n25x, or even higher multiples. I am not declaring that the S&amp;P 500 will\ntrade at these valuation multiples \u2013 just that it could. If the S&amp;P 500\nwere to trade at 25x 2021 earnings of, say, $160 a share, that would imply an\nS&amp;P 500 at 4,000. In my view, this type of outcome is actually more\npossible today than it is unlikely.<\/p>\n\n\n\n<p>For now, we will have to wait and see, but staying patient in times like these is no small feat, so to help you focus on the fundamentals instead of the fearsome headlines, I am offering all readers our Just-Released <strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2020_7_13&amp;content=stock_market_outlook_report\">August 2020 Stock Market Outlook Report. <\/a><\/strong><\/p>\n\n\n\n<p>This Special Report is packed with newly revised predictions\nthat can help you base your next investment move on hard data. For example,\nyou&#8217;ll discover Zacks\u2019 view on:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>S&amp;P 500 yearend targets<\/li><li>Is it time to buy stocks?<\/li><li>What should you think about\n\u2018unbelievable\u2019 jobs data?<\/li><li>International outlook<\/li><li>Zacks Rank S&amp;P 500 sector picks<\/li><li>Impacts of Coronavirus<\/li><li>And much more<em><\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<sup>7<\/sup><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The S&#038;P 500 forward P\/E looks like the late 90&#8217;s tech bubble. But here&#8217;s why it&#8217;s different.<\/p>\n","protected":false},"author":3,"featured_media":7430,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-8737","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8737","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=8737"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8737\/revisions"}],"predecessor-version":[{"id":10575,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8737\/revisions\/10575"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=8737"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=8737"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=8737"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}