Source: Jin10 Data
Even though the valuation of the S&P 500 index has reached a rare high in nearly 30 years, investors still flock to it. What makes them willing to pay higher prices for every future dollar of profit?
Six months ago, ordinary investors might have been willing to pay $5 for $1 of S&P 500 index. Today, they are willing to pay more. As of last week, investors are paying 20.57 times the expected earnings per share for the S&P 500 index in the next year, a 3.4-point increase from last October's market low. David Rosenberg, a well-known strategist, wrote in a report that such a short-term surge in the S&P 500 index's P/E ratio is extremely rare; it has only happened 5% of the time in the past 30 years. In a fundamentally healthy market, company profits and valuation expectations are usually in sync. However, for 2024, the S&P 500 index is expected to earn $243.33 per share, only about half a dollar more than forecasted at the beginning of the year. So why are investors willing to pay more? This is the dilemma facing the market this year. Despite some well-known strategists believing that these levels are unreasonable, valuations have surpassed 25 years of historical averages, and they have raised their price targets for the S&P 500 index to avoid being beaten by the bull market sentiment. Mike Wilson of Morgan Stanley wrote in a recent report, "Frankly, we have been very poor in our ability to forecast [profit and P/E ratio] over the past year, and while we believe valuations are too high, we have no confidence in predicting the timing and magnitude of their normalization." He raised his 12-month target from 4500 points to 5400 points. One reason for the high valuation is liquidity. Many metrics show that there is a lot of money available for investment in the market, driving up valuations. The most commonly cited cash reserve is money market funds, whose total assets reached $6 trillion in February, reaching a record high, and the latest data as of May 29 still keeps this record high. This idle money is usually invested in short-term debt, such as treasury bills, and can be turned into stock purchase at any time, forming a feedback loop. Other liquidity indicators also indicate a healthy level of funds in the system: overnight repurchase tools - a place where institutions deposit excess cash to earn interest from the Federal Reserve - reached $440 billion. M2 money supply is currently hovering around $21 trillion. More money flowing also means greater risk tolerance. The increase in the S&P 500 index valuation mainly comes from investors' pursuit of technology stocks, which are benefiting from optimism about artificial intelligence. The so-called "seven giants" - - - - have an expected P/E ratio of 30.71. According to Dow Jones market data, since last October's low, their comprehensive P/E ratio has increased by 3.8 points, higher than their 10-year average level, indicating that the high valuation of the S&P 500 index is mainly due to technology stocks. This view was further validated when observing the S&P 500 equal weight index, which assigns equal importance to each stock. As of last Friday, the future 12-month P/E ratio of the index was 16.31 times. Although valuations have risen since last October, they are consistent with the 10-year average level, indicating normalization of valuations for a range of companies. Momentum may also force investors to stay in the market longer than expected. As the S&P 500 index chases one high after another, investors are excited; in the first half of this year, the index closed at a record level 24 times. Few are willing to sell, which means that buyers must pay a higher price to attract sellers to trade.$S&P 500 Index (.SPX.US)$Future profits. Today, they are willing to pay more.
This is what is happening in the stock market. As of last week, investors were paying 20.57 times the expected earnings per share for the S&P 500 index for the next year, which is 3.4 points higher than the valuation at the market low point last October. The well-known strategist David Rosenberg wrote in a report that such a short-term increase in the S&P 500 P/E ratio is very rare; it has only happened 5% of the time in the past 30 years. In a fundamentally sound market, company profits and valuation expectations are usually on the same page. However, the S&P 500 index is expected to earn $243.33 per share in 2024, which is only about half a dollar higher than the forecast at the beginning of the year. So, why are investors willing to pay more? This is the challenge facing the market this year. Despite some well-known strategists believing these levels are unreasonable, valuations have surpassed 25 years of historical averages, and they have raised their price targets for the S&P 500 index to avoid being beaten by bull market sentiment. In a recent report, Morgan Stanley's Mike Wilson wrote, "To be honest, our ability to predict [earnings and P/E ratio] over the past year has been very poor, and although we believe valuations are too high, we have no confidence in predicting the specific time and magnitude of their normalization." He raised the 12-month target from 4,500 points to 5,400 points. One reason for the high valuation is liquidity. Many metrics indicate that there is a lot of money available for investment in the market, driving up valuations. The most commonly cited cash reserve is money market funds, whose total assets reached $6 trillion in February, setting a record high, and the latest data as of May 29 still keeps this record high. This idle money is usually invested in short-term debt, such as treasury bills, and can be turned into stock purchases at any time, forming a feedback loop. Other liquidity indicators also indicate a healthy level of funds in the system: overnight repurchase tools - a place where institutions deposit excess cash to earn interest from the Federal Reserve - reached $440 billion. M2 money supply is currently hovering around $21 trillion. More money flowing also means greater risk tolerance. The increase in the S&P 500 index valuation mainly comes from investors' pursuit of technology stocks, which are benefiting from optimism about artificial intelligence. The so-called "seven giants" have an expected P/E ratio of 30.71. According to Dow Jones market data, since last October's low, their comprehensive P/E ratio has increased by 3.8 points, higher than their 10-year average level, indicating that the high valuation of the S&P 500 index is mainly due to technology stocks. This view was further validated when observing the S&P 500 equal weight index, which assigns equal importance to each stock. As of last Friday, the future 12-month P/E ratio of the index was 16.31 times. Although valuations have risen since last October, they are consistent with the 10-year average level, indicating normalization of valuations for a range of companies. It also means that the momentum of stock prices may force investors to stay in the market longer than expected. When the S&P 500 index continues to set new highs, investors are excited; in the first half of this year, the index closed at a record level 24 times. Few are willing to sell, which means that buyers must pay a higher price to attract sellers to trade.
This is what is happening in the stock market. As of last week, investors were paying 20.57 times the expected earnings per share for the S&P 500 index for the next year, which is 3.4 points higher than the valuation at the market low point last October. The well-known strategist David Rosenberg wrote in a report that such a short-term increase in the S&P 500 P/E ratio is very rare; it has only happened 5% of the time in the past 30 years. In a fundamentally sound market, company profits and valuation expectations are usually on the same page. However, the S&P 500 index is expected to earn $243.33 per share in 2024, which is only about half a dollar higher than the forecast at the beginning of the year. So, why are investors willing to pay more? This is the challenge facing the market this year. Despite some well-known strategists believing these levels are unreasonable, valuations have surpassed 25 years of historical averages, and they have raised their price targets for the S&P 500 index to avoid being beaten by bull market sentiment. In a recent report, Morgan Stanley's Mike Wilson wrote, "To be honest, our ability to predict [earnings and P/E ratio] over the past year has been very poor, and although we believe valuations are too high, we have no confidence in predicting the specific time and magnitude of their normalization." He raised the 12-month target from 4,500 points to 5,400 points. One reason for the high valuation is liquidity. Many metrics indicate that there is a lot of money available for investment in the market, driving up valuations. The most commonly cited cash reserve is money market funds, whose total assets reached $6 trillion in February, setting a record high, and the latest data as of May 29 still keeps this record high. This idle money is usually invested in short-term debt, such as treasury bills, and can be turned into stock purchases at any time, forming a feedback loop. Other liquidity indicators also indicate a healthy level of funds in the system: overnight repurchase tools - a place where institutions deposit excess cash to earn interest from the Federal Reserve - reached $440 billion. M2 money supply is currently hovering around $21 trillion. More money flowing also means greater risk tolerance. The increase in the S&P 500 index valuation mainly comes from investors' pursuit of technology stocks, which are benefiting from optimism about artificial intelligence. The so-called "seven giants" have an expected P/E ratio of 30.71. According to Dow Jones market data, since last October's low, their comprehensive P/E ratio has increased by 3.8 points, higher than their 10-year average level, indicating that the high valuation of the S&P 500 index is mainly due to technology stocks. This view was further validated when observing the S&P 500 equal weight index, which assigns equal importance to each stock. As of last Friday, the future 12-month P/E ratio of the index was 16.31 times. Although valuations have risen since last October, they are consistent with the 10-year average level, indicating normalization of valuations for a range of companies. It also means that the momentum of stock prices may force investors to stay in the market longer than expected. When the S&P 500 index continues to set new highs, investors are excited; in the first half of this year, the index closed at a record level 24 times. Few are willing to sell, which means that buyers must pay a higher price to attract sellers to trade.
Valuations have surpassed 25 years of historical averages, and although some well-known strategists believe that these levels are unreasonable, they have raised their price targets for the S&P 500 index to avoid being beaten by the bull market sentiment. This is the dilemma facing the market this year. The increase in the S&P 500 index valuation mainly comes from investors' pursuit of technology stocks, which are benefiting from optimism about artificial intelligence. The so-called "seven giants" have an expected P/E ratio of 30.71. The comprehensive P/E ratio of these stocks has increased by 3.8 points since last October's low, higher than their 10-year average level, indicating that the high valuation of the S&P 500 index is mainly due to technology stocks.
Mike Wilson of Morgan Stanley wrote in a recent report, "Frankly, we have been very poor in our ability to forecast [profit and P/E ratio] over the past year, and although we believe valuations are too high, we have no confidence in predicting the timing and magnitude of their normalization." He raised his 12-month target from 4500 points to 5400 points.
One reason for the high valuation is liquidity. Many metrics indicate that there is a lot of money available for investment in the market, driving up valuations. The most commonly cited cash reserve is money market funds, whose total assets reached $6 trillion in February, setting a record high, and the latest data as of May 29 still keeps this record high. This idle money is usually invested in short-term debt, such as treasury bills, and can be turned into stock purchases at any time, forming a feedback loop.
Other liquidity indicators also indicate a healthy level of funds in the system: overnight repurchase tools - a place where institutions deposit excess cash to earn interest from the Federal Reserve - reached $440 billion. M2 money supply is currently hovering around $21 trillion. More money flowing also means greater risk tolerance. The increase in the S&P 500 index valuation mainly comes from investors' pursuit of technology stocks, which are benefiting from optimism about artificial intelligence. The so-called "seven giants" have an expected P/E ratio of 30.71.
The increase in S&P 500 index valuation mainly comes from investors' pursuit of technology stocks, which are benefiting from optimism about artificial intelligence. The so-called "seven giants" have an expected P/E ratio of 30.71.$NVIDIA (NVDA.US)$, $Apple (AAPL.US)$, $Amazon (AMZN.US)$, $Microsoft (MSFT.US)$, $Alphabet-A (GOOGL.US)$, $Tesla (TSLA.US)$ and $Meta Platforms (META.US)$The so-called "seven giants" have an expected P/E ratio of 30.71.
According to Dow Jones market data, since last October's low, the comprehensive P/E ratio of the so-called "seven giants" has increased by 3.8 points, higher than its 10-year average level, indicating that the high valuation of the S&P 500 index is mainly due to technology stocks.
This view was further validated when observing the S&P 500 equal weight index, which assigns equal importance to each stock. The future 12-month P/E ratio of the index is currently 16.31 times. Although valuations have risen since last October, they are consistent with the 10-year average level, indicating normalization of valuations for a range of companies.
Momentum may force investors to stay in the market longer than expected. When the S&P 500 index continues to set new highs, investors are excited; in the first half of this year, the index closed at a record level 24 times. Few are willing to sell, which means that buyers must pay a higher price to attract sellers to trade.
According to Rosenberg, the stock market is 'entirely animal spirits, emotions, and speculation, with nothing to do with economic basics...it just tells you about irrationality.' He quoted former Fed Chairman Greenspan in 1996, using the term 'irrational prosperity' to describe behavior in the stock market.
Stocks are overvalued. These stocks may be dragged back to the ground if inflation is too high or AI companies fail to achieve expected profits.
Editor / jayden