The AI-infused stock market rally has led to a general bear counterpoint in recent months.
Stock valuations, including for the benchmark S&P 500 (^GSPC), are simply too rich.
In a note on Sunday, Julian Emanuel, who heads Evercore ISI’s equities, derivatives and quant strategy, admitted that the index is indeed “expensive,” with the S&P 500 trading at more than 20 times its forward earnings. But Emanuel also raised his year-end target for the S&P 500 from 4,750 to 6,000 in the same note, in part because “high valuations can stay higher for longer.”
As our chart of the day from Emanuel shows, stocks haven’t been expensive for very long when comparing this rally to others. The S&P 500’s price-to-earnings ratio exceeded the level of 20 143 days ago, Emanuel said. During 2021’s reopening frenzy, the S&P 500 traded at similar valuation levels for 614 days. During the dot-com boom, the S&P 500 lasted 737 days at this level.
Moreover, returns were not nearly as robust either. Since entering “expensive” territory in late January, the S&P 500 has risen 11%, well below the 40%-plus return when valuations were stretched during the post-pandemic rally and the 63% return during the dot-com bubble. .
This is a reminder that while high valuations can calm investors, as periods of euphoria are often followed by a slowdown in the market rally, stock valuations can often remain higher for longer than many also think.
