S&P 500 has been partying, but valuations could be a 2025 dampener

Reuters

S&P 500 has been partying, but valuations could be a 2025 dampener

2024年10月21日，GMT下午4:33

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Main U.S. indexes red; Dow off most, down ~0.8%

Real Estate weakest S&P sector; Tech sole gainer

Euro STOXX 600 index falls ~0.7%

Dollar up; crude gains ~1.9%; gold ~flat; bitcoin down ~2%

U.S. 10-Year Treasury yield rises to ~4.18%

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S&P 500 HAS BEEN PARTYING, BUT VALUATIONS COULD BE A 2025 DAMPENER

Cameron Dawson, chief investment officer at NewEdge Wealth, is saying that the recent move higher in valuations has returned the S&P 500 index .SPX to around 22x forward earnings, a level that has only been surpassed two times in modern history: at the height of the late-1990s/2000s tech bubble and at the 2020 COVID peak when markets were being flooded with liquidity and earnings were depressed.

Here is a chart of the weighted average S&P 500 P/E ratio based on 12-month forward earnings:

As Dawson sees it, there are five main reasons that have combined to drive today’s high S&P 500 valuation:

1) Growth and Policy Support - She notes that earnings and GDP growth estimates have been rising, and have been underpinned by supportive fiscal and monetary policy

2) Liquidity - According to Dawson, liquidity has been supportive of risk assets over the last two years, aided by Treasury actions that have helped to offset tightening in liquidity from the Fed, such as from the shrinking of the Fed’s balance sheet.

3) Scarcity - Dawson says stocks are an increasingly “scarce” asset, with buybacks outweighing issuance significantly in recent years.

4) Constitution - As the S&P 500 has become increasingly dominated by high quality Tech and Magnificent 7 names, while old-economy sectors like Energy have shrunk, Dawson believes the overall index has arguably become more deserving of higher valuations.

5) Hopes and Dreams - She notes that optimism over AI/technology, positioning chases, and the fear of missing out, have all combined to create a "resiliently optimistic" sentiment backdrop over the past two years

"As we look to 2025, we do not expect valuation expansion to be the key driver of S&P 500 returns, which is another way of saying that we see valuations having greater downside risk than upside potential and that we see earnings growth being a bigger portion of price returns," writes Dawson in a note.

However, she cautions that valuations are a poor timing tool and given the backdrop of stimulative monetary and fiscal policy into a strong growth environment, that the potential for a melt-up or bubble cannot be ruled out.

Still, NewEdge sees the S&P 500 valuation as expensive and a potential dampener for 2025 equity market returns.

Separately, the Wells Fargo Investment Institute (WFII) believes that current S&P 500 index valuations could reasonably extend through the end of 2025. WFII has raised its year-end 2025 S&P 500 index target range to 6,200-6,400 from 5,900-6,100.

(The mid-point of WFII's year-end 2025 SPX target range is roughly 8% above current levels).

(Terence Gabriel)

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FOR MONDAY'S EARLIER LIVE MARKETS POSTS:

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