The S&P 500 (.SPX) fell for the week, despite being up more than 13% year to far, thanks to hints of lowering inflation, excitement over developments in artificial intelligence, and a greater appetite for risk.

These gains, however, have driven equities to higher prices. According to Refinitiv Data stream, the S&P 500 now trades at 19 times estimated 12-month earnings, significantly above its historical average of 15.6 times.

Historically, similar valuation levels have preceded periods of poor performance. According to Goldman Sachs, the S&P 500 has historically had a median decline of 14% over the next 12 months when values are at present levels or higher, compared to a 5% drawdown over a typical 12-month period.

INVESTORS – Investors stated that catalysts that might darken the view include unanticipated slowdown in economic growth, the possibility that the Federal Reserve could be more hawkish than markets have priced in, and a recovery in inflation.

GOLDMAN VIEW – Goldman recommended investors to consider “downside protection” for their stock portfolios, despite their expectation that the S&P 500 will reach 4,500 by year’s end, or roughly 3.5% higher than current levels.

SAMEER SAMANA – “With valuations increasingly stretching the boundaries of what we would consider reasonable. “We’d be taking some chips off the table,” Sameer Samana, senior global market strategist at Wells Fargo Investment Institute (WFII), explained.

The WFII recently downgraded the technology sector, which has led the S&P 500 gain this year, to “neutral” from “favourable,” citing “unattractive” values.

The Nasdaq 100 (.NDX) has outperformed the S&P 500 in terms of valuation, rising 36% this year. According to Refinitiv Datastream, the index trades at over 27 times forward earnings projections, compared to its historical average of 19.3 times.

Michael Purves, CEO of Tallbacken Capital Advisors – The earnings prognosis for the Nasdaq 100’s high-growth businesses is more bleak than it was in 2021, when the index also surged substantially, making it more difficult to justify high valuations, according to Michael Purves, CEO of Tallbacken Capital Advisors.

Despite the index’s massive increases, Purves noted that symptoms of weakening are surfacing in technical indicators relating to trends and momentum.

He used the acronym FOMO, or “fear of missing out,” to describe the current situation: “This whole wonderful momentum, FOMO trade, is starting to look a little long in the tooth here.” This resembles a flashing yellow warning light, sort of.

As the second quarter comes to a finish, investors will be keeping a close eye on more economic data the following week, particularly crucial inflation data on Friday.

The fact that some of the tailwinds supporting stocks in recent months may be fizzling out has been mentioned by market participants as another reason for caution.

One of them is positioning: Over the past few weeks, investors have piled into stocks out of concern that they may miss out on future gains. According to a metric kept track of by Deutsche Bank, investor equity positioning is at its highest level since January 2022.

While switching to equities has supported markets, it has also reduced the amount of fuel available to drive future advances.

Light positioning should no longer be a tailwind for the equity market,” noted Goldman’s analysts.

There are indications the rise may continue, to be sure. Some investors believe that stocks are now in a “bull market” phase as a result of the S&P 500’s over 20% increase from its October lows, and history shows that stocks typically continue to rise once they cross the 20% level.

This month, sectors like industrials and materials have also outperformed, which has raised hopes that the rally may spread beyond of the small group of megacap tech and other firms that have mostly driven this year’s gains.

Anthony Saglimbene, chief market strategist at Ameriprise Financial – According to Anthony Saglimbene, chief market strategist at Ameriprise Financial, a wider recovery “should make investors feel a little bit more positive.” However, he pointed out that the index’s abrupt rise above its short- and long-term technical trend lines may portend an impending reversal.

“From a near-term perspective, investors should expect stocks to just cool off a little bit.”

About The Author

Scroll to Top