S&P 500:Roadblock Ahead?

The strong rally by the S&P 500 since the March low has been driven by a host of factors. Confidence that the stimulative efforts by the Fed and government to produce a “V” economic recovery, continued capital flows from passive income strategies, and most recently market enthusiasm for the election of Joe Biden and the availability of several effective vaccines. These are all legitimately bullish for stocks.

However, this confluence of factors has driven market sentiment and valuation to levels last seen during the era of the internet bubble. A notable example is provided by the chart below. The S&P price-earnings ratio 24 months out is hovering at the levels seen in 2000.

The S&P’s stretched valuation, extreme investor optimism, and mounting evidence that the hoped-for “V” economic recovery is unlikely to occur suggests that a good deal of caution is warranted, despite the presence of bullish influences.

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