The S&P 500 fell 1 percent last week, its first weekly drop sine the US presidential election.
The pause in the US stock market rally last week came as USA Today reported that market valuations have become stretched.
“Since Election Day, the price-to-earnings (P-E) ratio, a common metric used to measure whether stocks are cheap or overvalued, have swelled further to 17.1 times earnings from 16.2 times, which is well above the long-term average of 15.3 over the past 30 years, according to Thomson Reuters,” wrote Adam Shell in the report.
“The market is pricing in great expectations,” says David Kotok, chief investment officer at Cumberland Advisors. “There is little margin for disappointment.”
However, other analysts remain sanguine.
“When there is a quantum shift in growth expectations, the arithmetic of P-E multiples fails to capture the value in stocks,” argues Don Luskin, chief investment officer at TrendMacro.
Jim Paulsen says the stock market’s current valuation is “not excessive” and that “a P-E of about 17 is probably a sustainable multiple for the overall market”.
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