One year ago right now @sonusvarghese explained why stocks would be the best investment the next 5 years.
S&P 500 up 31% the last 12 months, so off to a good start ? https://t.co/Nofxl9VA8w pic.twitter.com/xluSFyKfqK
— Ryan Detrick, CMT (@RyanDetrick) December 12, 2024
The U.S. stock market had a strong performance in 2024, with the S&P 500 index reaching an all-time high of 6,090.27 on Dec. 6. However, there are signs that the market may be overvalued.
Rule of 20, which says market is fairly valued when CPI y/y and S&P 500 P/E add to 20, suggests stocks have been getting increasingly expensive pic.twitter.com/bz4jUAJQ6J
— Liz Ann Sonders (@LizAnnSonders) December 12, 2024
In November, a Conference Board survey found that 56.4% of U.S. consumers expect the stock market to rise over the next year, the highest reading on record. Morgan Stanley sees this as a contrarian indicator, signaling irrational optimism when valuations are stretched. The S&P 500 recently reached a forward price-to-earnings (PE) ratio of 22.3, a premium to the five-year average of 19.7 and the 10-year average of 18.1. The market has not been this expensive since April 2021.
"New all-time highs add to the emotions, especially when you’re dealing with a big pile of cash after the market has experienced outsized gains." ? – @awealthofcs https://t.co/FW57V4bZaJ
— The Compound (@TheCompoundNews) December 12, 2024
Historically, the S&P 500 has only reached a forward PE ratio above 22 during two periods since 1985: the dot-com bubble and the COVID-19 pandemic. In both cases, the index fell sharply afterward. The current PE ratio based on trailing-12-month earnings is also high at 28.7, compared to the five-year average of 24.1 and the 10-year average of 21.9. According to LPL Research, the S&P 500 has never generated a positive 10-year return when the initial PE multiple exceeded 25.
Will $MSTR get into the S&P 500 index (aka the holy grail) next? Maybe, but could be a while, depends if an accounting rule is changed bc rn it has only been profitable one out of past 4 quarters. Also needs the “committee” to not reject it. In short more hurdles than $QQQ… pic.twitter.com/9WrSkRuWZb
— Eric Balchunas (@EricBalchunas) December 14, 2024
Goldman Sachs expects the S&P 500 to generate a total return of just 3% annually over the next decade, well below the long-term average of 11%. However, they note that a handful of companies are the primary reason for the high valuations.
S&P 500 valuations raise concern
“The premium valuation for the top 10 stocks is the largest since the dot-com boom in 2000,” Goldman analysts wrote. This suggests the other 490 stocks are priced more attractively and could outperform the traditional S&P 500 by 5 percentage points per year over the next decade. With stocks at all-time highs, investors need to be mindful of valuations when buying.
Having extra cash to capitalize on the next market correction or bear market is a good idea. For those with a large sum to invest, like $400k from a condo sale, there are a few reasonable options:
1. Lump-sum investment: Put all the money to work at once, betting that most of the time the stock market goes up.
2. Dollar-cost averaging: Invest the cash into the market periodically to diversify entry points and minimize regret. 3.
Diversified portfolio: Allocate assets to a broader mix of stocks, bonds, cash, and possibly other investments. The most important thing is to have a plan in place ahead of time to avoid guessing about what to do next. Every investor has to make decisions with imperfect information about the future.
