Valuation gap narrows as US stock market hits record high

US stocks rose last week to new highs. Reuters reports:

The Dow and the S&P 500 hit new highs on Friday for a sixth straight week of gains, as investors continued to take cues from Federal Reserve Chair nominee Janet Yellen, who told a Senate Committee it was too early to end the central bank's stimulus...

The Dow Jones industrial average was up 85.48 points, or 0.54 percent, at 15,961.70. The Standard & Poor's 500 Index was up 7.56 points, or 0.42 percent, at 1,798.18. The Nasdaq Composite Index was up 13.23 points, or 0.33 percent, at 3,985.97.

However, the market gains have reduced the number of bargains in the stock market. From Bloomberg:

Cheap is converging with expensive in the American equity market, narrowing options for investors looking for bargains after the broadest rally on record lifted almost 90 percent of the Standard & Poor’s 500 Index this year.

The difference in valuations shrank to the smallest since at least 1990 after companies such as Hormel Foods Corp. (HRL) and CenterPoint Energy Inc. rose to levels that match Ralph Lauren Corp. and Citrix Systems Inc., whose five-year average profit growth rate is twice as big. A measure of the dispersion of price-earnings ratios in the S&P 500 compiled by Goldman Sachs Group Inc. narrowed to 41 percent in June, the lowest on record, and held around that level since.

Meanwhile, the overall valuation of the stock market remains relatively low.

The full S&P 500 trades at about 17.5 times trailing 12-month earnings, in line with the average since the end of World War II, according to S&P data. The multiple stayed low as profits almost doubled from the level in 2008 and the Fed’s accommodative policies kept stocks relatively attractive.

Still, a reason for concern is that in the past, such narrowing in valuations have occurred in the late stages of bull markets.

The last time the dispersion of valuations came close to being this narrow was in October 2006, a year before the last bull market ended, Goldman Sachs data show. Before that, multiples were most compressed in September 1997, 10 months before the biggest bull market on record ended.