Stock investors are showing little concern as the S&P 500 approaches the 5,000 mark, despite high valuations, according to Leuthold Group. The S&P 500, which tracks large-cap stocks in the U.S., is on track to hit another record high this year. Despite this, analysts are neglecting to mention valuations when making their cases for the market. It seems that investors have become accustomed to the persistently high equity valuations.
The current bull market has seen a series of all-time peaks in 2024, fueled by a growing U.S. economy, easing inflation, and investor optimism surrounding artificial intelligence. However, Leuthold Group points out that the bottom of the previous bear market in October 2022 was the most expensive in history. The five-year normalized price-to-earnings ratio of the S&P 500 was significantly higher during the COVID collapse and has continued to rise.
Bob Doll, CEO and CIO of Crossmark Global Investments, believes that the current valuation of the S&P 500 is stretched. He warns that investors should not assume a “soft landing” for the U.S. economy and expects that the Fed may not be able to deliver on both double-digit earnings growth and six interest-rate cuts this year. The market is pricing in potentially five or more rate cuts, but Doll argues that it would require an economic slowdown for the Fed to make that many cuts. He also highlights wage growth as a potential risk for inflation.
Leuthold Group raises concerns about the stock market risks, noting that there have been three major declines in the S&P 500 in the past 5.5 years, despite the economy being in a recession for only two months during that time. Stock market risks would be even higher if one ignored nearly two years of Fed tightening. Despite these risks, the S&P 500 has risen by around 4.8% this year, driven by gains in Big Tech stocks like Nvidia, Meta Platforms, Amazon, and Microsoft.
While there is excitement surrounding artificial intelligence and its potential impact on the market, some investors, like Bob Doll, believe it is overhyped. Doll holds some tech stocks but focuses on those with more attractive valuations. Incumbents in the tech industry, such as IBM, are currently in the best position when it comes to AI, according to Solita Marcelli, CIO for the Americas at UBS Global Wealth Management.
Overall, stock investors seem unfazed by the high valuations and potential risks in the market as the S&P 500 nears the 5,000 mark. The current bull market has been driven by factors such as a growing U.S. economy and investor optimism surrounding AI. However, analysts and investors should not ignore the risks associated with high valuations and potential economic slowdowns. It remains to be seen whether the market can sustain its upward trajectory or if a correction is on the horizon.
