February 23, 2024
HC Chief Economist, Steve Taddie, CBE, CFM, contributes to this recent article in the International Business Times (IBT), focused on whether or not S&P 500 member companies’ valuations have become stretched, signaling an overvaluation.
Taddie states, “…the stretching of the S&P 500 valuation signals that markets bet on higher future earnings to close the valuation gap. Earnings should be able to support S&P 500 5,000+, but current valuations for the index have become a bit stretched. Earnings growth expectations for 2024 have not budged in about 12 months. Looking ahead at 2024 and 2025, analysts expect an 11-13% EPS growth. The market bets that future earnings fill the gap created by rising stock prices.”
He reasons that the market’s optimistic bet is based on higher productivity and labor cost cuts, which have not yet been diffused through the system. “A combination of applied AI and reduced headcount should provide more fuel for advancing productivity.”
In addition, corporate earnings could get a boost from the resilience of the U.S. consumer. “Two pillars of strength have emerged, rising “real” incomes and the benefits of fixed rate residential real estate investment,” he explained. “The combination has been at the core of the economy’s continued growth.”
Taddie also points out that earnings and price appreciation have been all about the Fabulous 5, the Magnificent 7, and the Top 10 in the past few years. “Earnings growth and valuation expansion outside of the narrow list of names have been hard to come by.”
Click here for the full article. Also, if you would like to review our recent Market & Economic discussion hosted by several members of the HoyleCohen Investment Team, which dives deeper into this and other related topics, click here.
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