Valuation question

The US stock market has gained about 15% since the 8 November US elections, triggering concerns on stock valuations


Photo: Bloomberg
Photo: Bloomberg

The US stock market has gained about 15% since the 8 November presidential election. Last week, the Dow Jones Industrial Average crossed 21,000 for the first time. Stocks have gained in anticipation of higher government spending, lighter regulation and faster growth.

With rising stock prices, valuation concerns are beginning to surface. For instance, the S&P 500 is trading at a cyclically adjusted price to earnings ratio (Shiller PE) of about 30 and looks fairly overvalued. However, it is being argued that valuation tends to expand when interest rates are low. Higher valuation is also being justified by the improving outlook in the US and other parts of the world.

Analysts and investors value stocks differently and a simple historical PE comparison may not always be sufficient. But the key question for Wall Street is: How long will the party last when the economy is operating at close to full employment level and the Federal Reserve is preparing to tighten interest rates quicker than the markets were expecting?

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