WALL ST THE WEEK AHEAD
MAJOR stock indexes have never been higher – but the soaring stocks are yet to frighten investors.
Shares have soared in 2013, with the Dow climbing almost 11 per cent to hit a series of new all-time highs while the S&P 500 has jumped 9.4 per cent, falling just short of its all-time closing high after rising for 10 of the past 11 weeks. And yet, analysts for the most part see equities as fairly cheap.
The rally has slowed, however. In the last eight trading sessions, the S&P 500 has managed a daily gain of more than 0.5 per cent just once. Questions remain about the potential impact of US budget negotiations or the Federal Reserve’s plans in continuing its massive monetary stimulus. The Fed meets this week.
Taken on its own, analysts see potential for more gains in the US stock market, based on metrics like earnings prospects and valuation. The forward 12-month price-to-earnings ratio for the S&P 500 is currently 13.5, which is about 9 per cent less than the October 2007 ratio of 14.8 when the S&P last hit a record.
“This shows that stocks are cheaper than they were at the time of the last high, and at the same time, alternative assets like bonds are much more expensive,” said Paul Zemsky, of ING Investment Management in New York.
The S&P 500’s earnings yield – a reverse of the P/E ratio – currently stands at 7.1 per cent, compared with 6.41 per cent for the BofA Merrill Lynch US High Yield Index.
Meanwhile interest rates remain near record lows while dividends are growing, another way that stocks are outshining bonds. In the most recent quarter, the average dividend yield for S&P 500 companies was 2.19 per cent, more than the 1.89 per cent yield in the fourth quarter of 2007, the period of the last market peak, according to Standard & Poor’s.