Categories: Market Commentary, Stock Market
Investors are asking, “Is the market too high?” While values are at an all-time peak, S&P500 prices relative to earnings (P/E ratio) are only slightly higher than the 25-year average (Graph 1).
Additionally, when compared to the last two bear-market peaks of 2000 and 2007 (Graph 2), long-term interest rates are now much lower, suggesting a cheap market in comparison.
We don't foresee large increases in stock values, but there are opportunities for growth due to several factors.
- Many of the new administration’s proposed tax and spending policies are pro-business and pro-economy. These policies coupled with continued modest interest rates will fuel U.S. companies and therefore U.S. equities.
- Corporations look healthy. With earnings near all-time highs and reserves full of cash, they are ripe for economy-boosting investment that also should provide a nice tailwind for U.S. equities.
- As stated above, equity P/E ratios are still hovering slightly above their long-term average.
- Wage growth has not yet caught up with employment.
- Bonds are likely to experience a slight disadvantage from anticipated interest-rate increases, which should spur further investment in equities.
If we start looking for a bear market, we find that none of the triggers that historically sparked downturns are present. Previous triggers have included aggressive Fed policies (the Fed is raising rates very slowly), commodity price hikes (energy is still trading at less than half of its high), a recession (we’re growing slowly), and extreme market valuations (addressed above). A bear market can, of course, happen at any time, but we see nothing to suppose one is imminent.
In short, though the all-time-high markets are causing questions, we foresee an extension to our eight-year equity bull run.