The stock market rally fueled by artificial intelligence technology has sparked concern among some investors in recent months. Many argue that stock valuations, particularly those of the S&P 500, have become excessively high.
In a recent note, Julian Emanuel of Evercore ISI acknowledged that the S&P 500, currently trading at over 20 times its forward earnings, is indeed “expensive.” However, Emanuel also raised his year-end target for the index to 6,000 from 4,750, suggesting that high valuations may persist for longer than expected.
Looking at historical data, it becomes clear that the current expensive valuations may not be as concerning as they seem. According to Emanuel’s analysis, the S&P 500 has only been trading at similarly high valuation levels for a relatively short period of time compared to previous rallies. For instance, during the COVID reopening frenzy in 2021, the index maintained similar valuations for 614 days, and during the dot-com bubble, it stayed at such levels for 737 days.
Moreover, the recent returns of the S&P 500 do not reflect the same level of robustness seen during previous periods of high valuations. Since reaching the “expensive” territory in late January, the index has only gained 11%, significantly less than the 40% returns observed during the post-pandemic rally and the 63% return seen during the dot-com bubble.
This analysis serves as a reminder to investors that while high valuations may warrant caution, they do not necessarily indicate an imminent market downturn. In fact, history has shown that stock valuations can remain elevated for longer periods than expected, providing opportunities for savvy investors to capitalize on continued market growth.
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