Are Stocks Overvalued?

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, LLSC, LLSP, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWL, RWM, RYARX, RYRSX, SBUS, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USSD, USWD, UWM, VFINX, VOO, VTWO, VV
by: OppenheimerFunds

Summary

Few signs of bubbles and the current mix of growth and low rates may keep supporting stocks.

In our view, solid economic growth, low and modestly rising interest rates, contained inflation, and benign policy all support a continued strong environment for equities.

International and emerging stocks are currently trading at discounts to U.S. stocks and are supported by solid and improving fundamentals, which may provide attractive opportunities for investors.

By Krishna Memani, Chief Investment Officer

On every valuation metric - price-to-earnings, price-to-sales, price-to-book, price-to-cash flow - U.S. stocks are currently trading above their long-term averages. The current U.S. equity cycle is already the second longest on record and valuations are now more extended than they have been in every other cycle besides 1987-2000.

Valuations, however, should not simply be viewed in isolation. First, it is important to note that valuations historically have not been reliable predictors of near- to intermediate-term returns. Valuations also have to be examined within the context of the current macroeconomic, interest rate, inflation, and policy environment.

Current Valuation Levels Don't Suggest A New Bear Market

In the past, there has only been a minimal to modest correlation between U.S. equity valuations and their returns over subsequent periods of 5 years or less. What that means is that simply knowing that equities are trading at elevated valuations provides very little insight into how equity markets will perform in the short and intermediate term.

Investors may want to keep these key considerations in mind:

  • Most valuation metrics, even the cyclically adjusted price-to-earnings ratio, paint a far more sanguine picture of the market than the headlines would suggest.
  • Stocks, on the basis of their earnings yields, still look attractive relative to bonds, even this late in the cycle.
  • While certain segments of the market, like technology, look moderately expensive, these valuation differentials, when viewed in the context of prior periods of excess like the tech bubble of the late 1990s, appear to be far more contained.
  • International and emerging stocks are currently trading at discounts to U.S. stocks and are supported by solid and improving fundamentals, which may provide attractive opportunities for investors.
  • The U.S. Federal Reserve typically raises rates during periods of low unemployment, sound wage growth, and improving economic activity, all of which may potentially benefit equities.

In our view, solid economic growth, low and modestly rising interest rates, contained inflation, and benign policy all support a continued strong environment for equities.

For more details on our positive outlook for stocks, be sure to view the accompanying paper.

Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.

These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.

Carefully consider fund investment objectives, risks, charges, and expenses. Visit oppenheimerfunds.com or call your advisor for a prospectus with this and other fund information. Read it carefully before investing.

OppenheimerFunds is not affiliated with Seeking Alpha.

©2017 OppenheimerFunds Distributor, Inc.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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