Thursday, 29 June 2017

US stocks rise despite elevated valuations

Markets were mixed on Wednesday.

The S&P 500 rose 0.9 percent, the STOXX Europe 600 was flat while the Nikkei 225 fell 0.5 percent.

Sam Stovall, chief investment strategist at CFRA, wrote that investors “are encouraged by the likely eventual passage of a tax cut, combined with a projected pickup in U.S. economic growth and the expected outperformance of actual earnings growth versus estimates” but “are held back by elevated valuations”.

However, Kim Forrest, senior analyst and portfolio manager at Fort Pitt Capital Group, said that stocks are “fairly valued”.

Goldman Sachs strategist Charles Himmelberg wrote in a note on Wednesday: “With interest rates near multi-century lows, the so-called 'Fed model,' which compares earnings yields to bond yields, retains a powerful grip on the 'valuation narrative' in the equity market.”

However, he also said that “yield comparisons across equities and bonds are a flawed metric” as it does not take into account future inflation and corporate earnings growth.

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