The S&P 500 has surged more than 18% from January to August, marking its strongest first eight months since 2021 and the second-best performance of the century. According to Ned Davis research chief U.S. equity strategist Ed Clissold, this year’s rally in stocks has pushed the price-to-earnings (PE) ratio to levels last seen in the dotcom bubble and he warned investors to be cautious.
The S&P 500 has surged more than 18% from January to August
Ned Davis research chief U.S. equity strategist Ed Clissold said that for instance, the S&P 500 forward P/E ratio of 21.6 ranks in the top 9% of all monthly readings since 1983, and the only times it was higher were during the dotcom bubble in 1998-2001 and after the pandemic shutdowns in 2020-2021.
In contrast, this year, the benchmark 10-year Treasury yield has dipped by about 7.3 basis points. Although it climbed to a peak of 4.7% in April, it never surpassed its 2023 high of just over 5%. According to Ed Clissold, this decline in yields has benefited stocks, as lower yields translate to higher bond prices. U.S. equity strategist Ed Clissold added:
“In order for stocks to be attractive versus other asset classes, not only do long-term bond yields need to remain low, but the Fed needs to follow through on its telegraphing of multiple rate cuts before year-end.”
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Federal Reserve’s Policy Decisions
The Federal Reserve’s policy decisions will be crucial. If inflation remains under control, the Fed may adopt a more dovish stance, which could support further equity gains. Continued economic expansion could bolster investor confidence, but signs of slowing growth or a potential recession might trigger caution.
Because of this, corporate performance for Q3 will also set the tone for investor sentiment. Strong earnings could fuel optimism, while disappointing results might dampen enthusiasm. Even though the market has shown strong performance, the final quarter is likely to be marked by a mix of optimism and caution.
Investors may focus on securing gains while remaining vigilant to any emerging risks and a balanced approach, considering both the opportunities and risks, will be essential for navigating the market in the months ahead.
