Stock valuations are quite stretched, and that could mean a rough stumble is in store for the market, says Binky Chadha, chief global strategist at Deutsche Bank.
The valuations are “historically extreme” in almost any metric, he said in a commentary cited by MarketWatch. As a result, “With the current cycle advancing very quickly, the risk that the correction is hard is growing,” Chadha said.
The S&P 500’s forward price-earnings ratio stands at 21, up from its five-year average of 18.2 and from its 10-year average of 16.3, according to FactSet. The market hasn’t seen a 10% correction since its meltdown in March 2020.
The S&P 500 recently stood at 4,484, down 0.2%. It has climbed 19% so far this year and has doubled from its March 23 nadir of 2,237.
The “very expensive” current levels of stocks don’t guarantee a large pullback, Chadha said. If earnings gains outpace stock-price gains, valuations will dip that way. But the risk is there.
Prominent stock watcher Ed Yardeni sees things differently. He told CNBC that the S&P 500 will reach 5,000 by year-end amid strong earnings.
Some 87% of S&P 500 companies exceeded analysts’ forecasts for the second quarter, according to FactSet.
Some analysts say the market is due for a dip, but Yardeni disagrees. “I’m not in the correction camp,” he said. “But when they happen, I hope people use that as an opportunity to buy some more.”
To be sure, it’s not early in the stock rally, Yardeni acknowledged. But he sees a consolidation as more likely than a correction.