AllMarket Outlook
logoArgusApril 21, 2021

Daily Spotlight: Stocks Still Above Fair Value

Market Outlook
Bullish - Short term
Summary

Stock prices, as expressed by the S&P 500, are near all-time highs. Further, on depressed earnings, stocks are well above fair value, which our model pegs at closer to 3500 due to the weak pandemic-influenced EPS in 2020. Our stock market valuation model takes into account factors such as stock prices, five-year normalized earnings (three historical years, two forward-looking), GDP, inflation, and T-bond and T-bill yields. We note that stocks rarely trade right at fair value. Since 1960, on average, the index has traded at a tight 2% above fair value, but the standard deviation to the mean is 16%. As such, we normally expect the S&P 500 to trade between 14% undervalued and 18% overvalued. At current prices, the stock market is almost 30% above fair value, implying that investors are quite optimistic about equities. Though we are bullish on the economy, earnings and market recoveries, we'd feel better about the longer-term outlook for stocks if valuations were not so stretched. Several factors could improve valuations: a pullback in stock prices; lower bond yields; or better earnings, which we expect in upcoming quarters.

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