历史经验支持这种乐观情绪，尤其是在美联储确保美国经济仍然健康的情况下。根据Evercore ISI自1970年以来的数据，The boost to US stocks from the Federal Reserve's interest rate cut may be limited, and future main driving factors will shift to...
With the long-awaited rate cut cycle initiated by the Federal Reserve, some investors are concerned that overvalued US stocks may have already reflected the benefits of loose monetary policy, making it more difficult for the market to rise further.
On Thursday, the day after the Federal Reserve made a significant 50 basis point rate cut to support the economy, investors' delight was apparent as the three major US indices collectively closed higher with the S&P 500 index and the Dow hitting new all-time highs.
Historical experience supports this optimistic sentiment, especially when the Federal Reserve ensures the continued health of the US economy. According to data from Evercore ISI since 1970, as long as the economy avoids recession, the S&P 500 index has averaged an 18% annual increase after the first rate cut in an easing cycle.
However, in recent months, as investors anticipating the Fed rate cuts have flocked to stocks and other assets seen as benefiting from loose monetary policy, stock valuations have risen. This has led to an expected P/E ratio for the S&P 500 index of over 21 times, well above its long-term average of 15.7 times. Despite weaker than expected US job growth in recent months, the index has already risen by 20% this year.
Therefore, Robert Pavlik, Senior Portfolio Manager at Dakota Wealth Management, pointed out that in the short term, the upside driven solely by rate cuts is limited. He mentioned, "With the economy cooling down, people are feeling a bit nervous about the 20% gain."
French industrial bank analysts stated in a report that other valuation indicators like P/B and P/S ratios also indicate that US stock valuations are significantly higher than historical averages. For example, the current trading price of US stocks is five times their book value, compared to a long-term average of 2.6 times.
French industrial bank commented, "The current levels can be summarized in one word: expensive."
Lower interest rates will boost the stock market in several ways. The expected reduction in borrowing costs is likely to stimulate economic activity, thereby improving corporate profits.
The decline in interest rates will also lower the yields on cash and fixed income, weakening their competitiveness with stocks as investments. The yield on the 10-year US Treasury benchmark has dropped by about 1 percentage point since April to 3.7%, but rebounded slightly this week.
Lower interest rates also mean that future corporate cash flows will be more attractive, which typically pushes up valuations. However, according to data from LSEG Datastream, the PE ratio of the S&P 500 index fell to 15.3 times by the end of 2022, rebounding significantly to 17.3 times by the end of 2023.
Matthew Miskin, Co-Chief Investment Strategist at John Hancock Investment Management, said: "Prior to this, US stock valuations were quite reasonable. Multiples expansion in the past one or two years will be challenging to replicate in the coming years."
Miskin and others stated that as further valuation upside is limited, earnings and economic growth will be the main drivers of the stock market. Based on data from LSEG IBES, it is expected that earnings of S&P 500 index constituents will grow by 10.1% in 2024, followed by another 15% increase next year. The upcoming third-quarter earnings season starting next month will test valuations.
Meanwhile, there are indications that the Fed's rate cut pledge may have already attracted investors. Jim Reid, Global Head of Macro and Thematic Research at Deutsche Bank, has been studying data since 1957. He pointed out that while the S&P 500 index typically remains flat in the 12 months before a rate cut cycle, this time it surged nearly 27%.
Reid stated in the report: "You could argue that part of the potential 'no recession easing cycle' returns have been borrowed from the future."
It is certain that many investors have not been deterred by high valuations and remain optimistic about US stocks.
Valuation is often a clumsy tool when deciding when to buy or sell stocks, especially considering that momentum may cause the market to continue rising or falling for several months before returning to historical average levels. The expected price-earnings ratio of the S&P 500 index was above 22 times for most of 2020 and 2021, reaching 25 times during the 1999 internet bubble period.
Furthermore, rate cuts during high stock market times often benefit the market a year later. Ryan Detrick, Chief Market Strategist at Carson Group, stated that since 1980, the Fed has cut rates when the S&P 500 index was less than 2% from its historical high 20 times. Detrick mentioned that every time this happened, the index rose a year later, with an average increase of 13.9%.
UBS Global Wealth Management analysts stated in a report: "Historically, when the Fed cuts rates and the U.S. economy is not in a recession, the stock market performs well. We expect this time to be no exception."