LIVE MARKETS-Breadth of S&P 500 valuations positive for stocks

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BREADTH OF S&P 500 VALUATIONS POSITIVE FOR STOCKS

The breadth of high valuation companies in the S&P 500 index is a positive sign for stocks and differentiates today’s market from the dotcom bubble, according to Capital Economics.

“While the S&P 500 has become increasingly concentrated in terms of earnings and market capitalisation, high valuations have not concentrated in the same way. Instead, there has been broad-based valuation gains across the index,” James Reilly, senior markets economist at the firm said in a report on Wednesday.

“That’s the opposite of what happened, for example, during the latter stages of the 'dotcom bubble' and is, to us, another reason to think that valuations aren’t a major cause for concern.”

Reilly noted that the difference between the excess earnings yield of the index (the difference between its earnings yield and the real 10-year Treasury yield) and that of its median constituent ballooned during the dotcom bubble. For now, however, it has remained fairly contained.

The dispersion of S&P 500 constituents’ valuations is also low for now, after spiking during the dotcom bubble. The conclusion also holds up when grouping companies in different ways, including by their forward twelve-month valuations, Reilly said.

All in all, the breadth of high valuations is “an encouraging sign that this bubble is not near an end. It also suggests there is plenty more scope for the ‘winners’ to outperform the median S&P 500 firm if valuations shift meaningfully in their favour, as happened in the dotcom bubble,” Capital Economics concludes.

(Karen Brettell)

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