Stock market: It’s not a bubble but it is overvalued says Hugh Johnson
According to a study released today by Deloitte, 84% of Fortune 500 CFOs believe the US stock market is overvalued. And only 2% of CFOs think U.S. stocks are undervalued.
The findings add to the growing evidence that skyrocketing stocks, fueled in part by the Federal Reserve, are already exceeding all reasonable limits.
Even though the increased unemployment rate shows that the real economy is still suffering from the pandemic, the S index&The P 500 skyrocketed 55% from the March 23 low. The index not only recovered all of its losses, but even set new highs. Nasdaq climbed a staggering 70% over this period.
Yet the leaders of corporate America are nowhere near as optimistic as one might assume..
CFOs’ optimism for their companies has plummeted to an all-time low. 60% of those surveyed by Deloitte believe that the North American economy is in bad or very bad shape. Only 7% think economic conditions are good.
For the first time in ten years of research conducted by Deloitte, CFOs were more optimistic about the Chinese economy than the North American economy.
What’s more, the percentage of CFOs expecting economic conditions in North America to improve next year fell from 58% to 42%..
Collectively, Deloitte said the results indicate «growing skepticism about the pace of progress».
However, there seems to be little skepticism on Wall Street as investors flock to stocks in response to unprecedented easy money from the Fed..
A sharp rise in stock prices has pushed traditional valuations to levels unseen in decades..
According to FactSet, as of Tuesday’s close S&The P 500 exceeded the projected profit by 22.6 times. This price-earnings ratio is well above the five and 10 year averages of 17.1 and 15.4, respectively..
In fact, this is only slightly below the peak P / E ratio that reached 22.9 on June 8. It was the highest P / E since September 2000, just before the dotcom bubble burst..
Citigroup’s panic / euphoria model is the most euphoric since the dot-com bubble, recently hitting levels that have signaled an impending stock market downturn in the past..
And the CNN Business Fear and Greed Index (Fear & Greed Index) stands firmly in the territory «greed», although it remains a consequence «extreme greed», at least for now.
Taking advantage of the state of extreme euphoria in the stock market, many companies seek to make money by selling their shares to the public.
According to research firm Dealogic, 41 public offerings were made this month alone for a total of $ 16.4 billion, the highest in August on record. This includes IPOs as well as offers through Special Acquisition Companies or SPACs. In recent weeks, unicorns including Airbnb and Palantir have also announced their intention to go public..
«Sentiment is becoming more positive, and fear of missing out is a powerful incentive for investors to return to the market.», – wrote on wednesday Brad mcmillan, Chief Investment Officer, Commonwealth Financial Network.
Macmillan urged investors to act rationally. «We shouldn’t get excited», – he said. «All-time highs are great and often lead to further rallies. But they can also signal increased risk.».
Of course, there are several good reasons for such a sharp rise in market values..
Investors usually feel the economic recovery long before Main Street does. And even though GDP collapsed in the second quarter, there is clearly a recovery. Atlanta Fed’s GDPNow Model Calls for 25.6% YoY GDP Growth in Third Quarter.
Corporate America’s bottom line is shrinking, but perhaps not as much as feared. Earnings per share were nearly $ 8 higher than expected in the first half, according to Citi. Some forecasts for 2021 are also rising.
And there is hope for a medical breakthrough that will make it easier to treat or even vaccinate against coronavirus.
The real key to market recovery, according to many experts, – this is the fed.
By cutting interest rates to zero and promising to keep them at that level for the foreseeable future, the US central bank is essentially forcing investors to bet on stocks. The yield on ordinary government bonds does not look attractive at all right now..
«Stocks just aren’t that high compared to the extremely overvalued bond market», – said Michael kelly, Chief Executive Officer of Diversified Portfolios at PineBridge Investments.
Kelly said he is not worried that stocks are in a bubble because the Fed is likely to keep interest rates extremely low for a very long time. If that happens – and corporate earnings recover – then stocks will look good..
«If cash flows can go back to where they were before, – said Kelly, – then everything will be adequate.».
Citi warned that by the end of the year, the S&The P 500 may fall to 2,900. Citi raised its year-end target to 3,300 on Monday, in part due to «unbridled fed easing».
«Despite the euphoria in the mood of our indicators and less attractive valuation, shares continue to grow and may rise in price even more if investors want to chase stock indicators», – wrote on Monday in a note to clients by Citi’s chief U.S. stock strategist Tobias Levkovich. «Indeed, we see shades of 1999, but then the Fed began to tighten, and now there is no hint of a repetition».
In any case, the Fed makes it very clear that it plans to support the economy, and therefore the market, as long as necessary..
«We still think the market can outpace itself, but the Fed will «the utmost», to prevent American stocks from falling», – wrote Levkovich.
In other words, the markets could be overvalued, but it doesn’t really matter if the Fed continues to step on the gas pedal..