Are Stocks Still a Bargain at Current Levels?

Stocks are reaching levels that are making them neither a deal nor expensive. The Dow Jones Industrial Average has gained over 30% in the past eight weeks and the S&P’s 500-stock index is up nearly 40%. Can it be argued the market is no longer a bargain at these levels since valuations are shifting toward bearishness on the near-term outlook?

From WSJ: While the rebound was a relief for battered stock investors, it complicated matters for those still trying to decide whether to get in or add new holdings. Higher prices have made stocks less of a screaming buy by several valuation measures.

For example, based on the last 12 months of operating earnings, the S&P 500 was changing hands late last week at a price-to-earnings ratio of 14.7, according to Morgan Stanley. That is still below the average trailing P/E of 17 for the last 25 years but up sharply from 10.5 in February.

Looking ahead to expected earnings for the next year, the story is less compelling for buying stocks. The S&P 500 was at a forward P/E of 14.5 late last week compared with a 25-year average of 15, according to the Morgan Stanley data. But many investors are reluctant to put too much weight on the forward P/E ratio during a period of significant uncertainty about the earnings outlook.

Last October and November, for example, the S&P 500 appeared to be extremely cheap on that basis, trading below a P/E of 11. But it turned out that analysts had wildly overestimated the earnings for the year ahead.

I think we have had a great run here but need a cool-off period. Many of the financials have doubled if not tripled since March 9 lows. Some kind of pullback from the current levels would be healthy for the stocks and the major averages in general.

Graph: Wall Street Journal

Be the first to comment

Leave a Reply

Your email address will not be published.


*