The AI-fueled stock market rally has created a common bearish view over the past few months.
Stock valuations, including that of the S&P 500 (^GSPC), are simply too rich.
In a note on Sunday, Julian Emanuel, who leads equities, derivatives and quantitative strategy at Evercore ISI, admitted that with the S&P 500 trading at 20 times its forward earnings, the index is already “expensive.” But Emanuel also raised his year-end target for the S&P 500 to 6,000 points from 4,750 points in the same paper, in part because “high valuations can stay higher for longer.”
As our chart of the day from Emanuel shows, stocks haven’t been that expensive for a long time when comparing this rally to others. The S&P 500’s forward price-earnings ratio topped 20 143 days ago, according to Emanuel. In the coronavirus reopening frenzy of 2021, the S&P 500 has traded at similar valuation levels for 614 days. During the dot-com boom, the S&P 500 held at those levels for 737 days.
Moreover, returns were not strong either. Since reaching “expensive” territory in late January, the S&P 500 has risen 11%, well below the more than 40% returns seen when valuations stretched during the post-pandemic rally and the 63% return during the dot-com bubble. .
This serves as a reminder that while high valuations can give investors pause, as periods of euphoria are often followed by the disintegration of a market rally, stock valuations can often remain higher for longer than many think as well.
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