Only for those who are vertigo-free? Wall Street rally might break a new record If you look at the development of the S&P 500 in the past eight years, it was probably a good thing to be vertigo-free. Apart from small corrective phases, the trend has been moving steadily upwards ever since the Lehman crash. This rally is already the second-longest bull market of all times. However, to surpass the rally of the 1990s that ended with the dot-com crisis, it would have to run until 2021.
Nonetheless, one can only compare the present with the euphoria at the time – which ended with painful losses as is well-known – to a limited extent. First of all, you have a very robust earnings dynamic in the S&P 500 index. The leading US index posted earnings gains of 16.5% in the first quarter 2017, the strongest growth rate since 2011. The highest level of positive surprises (over 80%) was delivered by technology stocks, a development widely appreciated by investors. The Nasdaq Composite Index has already gained 10% this year (in USD) and in April it crossed the 6,000 point mark. Still, tech stocks are at the heart of the debate about whether we are currently seeing a repeat of the scenario of the turn of the millennium.
Apple, Google (Alphabet), Microsoft, Facebook and Amazon: these five stocks alone have contributed around one-third to this year’s performance of the S&P. Last year, their share in the overall performance of the index was “only” 17%. The fact that the rally is concentrated in a few winners deserves considerable attention, of course. However, as regards valuations – which in the final phase of the dot-com rally had risen to extreme heights – we are still far from those all-time highs. Apple, for example, which is currently the largest company in the US, has a price-earnings ratio of 17, while Microsoft, which is in 2000 was the biggest US company in terms of market capitalization, then had a price-earnings ratio that was twice as high.
Overall, one can say that the US market is generally no longer really inexpensive as regards valuations, and that the current rally has been very long-running. These facts are reflected in our investment strategy, as we have recently reduced the equity ratio from “overweight” to “neutral”.
S&P 500
Author:
Monika Rosen
Head of Research
Bank Austria Private Banking
26 May 2017
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