The AI-infused stock market rally has prompted a common bear counterpoint over the past few months.
Stock valuations, including for the benchmark S&P 500 (^GSPC), are simply too rich.
In a note on Sunday, Julian Emanuel, who leads Evercore ISI’s equity, derivatives, and quantitative strategy, admitted that with the S&P 500 trading above 20 times its forward earnings, the index is indeed “expensive.” But Emanuel also raised his year-end target for the S&P 500 to 6,000 from 4,750 in the same note, in part because “high valuations can remain higher for longer.”
As our chart of the day from Emanuel shows, stocks haven’t been expensive for that long when comparing this rally to others. The S&P 500’s forward price-to-earnings ratio crossed the 20 level 143 days ago, per Emanuel. In the 2021 COVID reopening frenzy, the S&P 500 traded at similar valuation levels for 614 days. During the dot-com boom, the S&P 500 lasted at those levels for 737 days.
Furthermore, the returns haven’t been nearly as robust either. Since reaching “expensive” territory in late January, the S&P 500 has gained 11%, well short of the more than 40% returns seen when valuations were stretched during the post-pandemic rally and the 63% return seen during the dot-com bubble.
This serves as a reminder that while high valuations can provide investors pause, as periods of euphoria are often followed by an unwinding of the market rally, stock valuations can often stay higher for longer than many believe too.