Stock Market’s Rise Doesn’t Jibe with Overvalued P/E, Stovall Warns

The stock market, despite Thursday’s slight pullback on more news of China tensions, has had a pretty good run since it bottomed out March 23 amid the early coronavirus panic. But maybe it’s getting ahead of itself, in light of a bloated price/earnings (P/E) multiple, says Sam Stovall.

The S&P 500, up 35% since the March low point, has truly quickened many an investor’s heart. Yet to Stovall, chief investment strategist at CFRA, “one can’t help but wonder if the market has gotten ahead of its fundamentals.”

Stovall, who has a long-term bullish outlook for stocks, isn’t so sure that the near-term results will be wonderful. “Like an irresponsible teenager,” he wrote, “is the S&P 500 borrowing against future allowances that it may have trouble repaying?”

Today, he pointed out in a research note, the benchmark index is expected to trade at 23.2 times projected earnings for the next 12 months, according to S&P Capital IQ consensus estimates. That’s 41% above its average P/E ratio of 16.5 since 2000. Meanwhile, he said, 10 of 11 S&P 500 sectors trade at double-digit premiums to their long-term averages. The same is true of S&P’s mid-cap, small-cap, growth, and value indexes.

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Stovall acknowledges that market prices anticipate the future, which some think should be better now due to a re-opening of the US economy, possible new stimulus from Washington, and hopeful news about COVID-19 vaccines. Although prospects for an earnings resurgence this year are iffy, many forecasts expect a good 2021, with a consensus expansion of 30%.

A renewed trade war with China—President Donald Trump has indicated he might crack down on Beijing for its heavy hand with Hong Kong—is one ominous sign that the economic scene may get even hairier than at present. Stovall turns to technical indicators to show that anxiety may be bubbling beneath the market’s surface. He indicated that the major US equity market indexes (S&P 500, Nasdaq 100, and the Russell 2000) are trading at or below important price-resistance levels, by i10 Research’s measure.

Beyond Stovall’s unease, there’s a crucial difference between what Wall Street and Main Street think. The stock market may be just 12% shy of February’s peak, but consumer sentiment is in the sub-basement.

The gap between the S&P 500’s monthly percentage rise and the University of Michigan’s consumer sentiment survey’s fall widened to 32 percentage points in April, the biggest gulf since 1978, by the reckoning Dow Jones Market Data. (That’s because the S&P 500 gained 12.6% and the sentiment gauge lost 19.4%.)

After all, the economic situation of many Americans is plain lousy. Since the pandemic’s start through last week, unemployment claims ballooned above 40 million. It’s cold comfort that the rate of increase is slowing, to just 2.1 million added last week, an unthinkable figure just four months ago.