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The Stock Market Is Now At Extremely High Valuations



  • The S&P 500 is now trading at over 18 times 2023 earnings estimates.
  • This has historically occurred in just five periods since 1985 on the 2-year forward P/E.
  • The trend for earnings growth appears to be more challenging in future years.
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The S&P 500's recent gains have come despite nothing changing on a multitude of levels. In some cases, the environment for stocks has grown worse. The Nasdaq 100 has rebounded off a very sharp March decline, while the Small Cap Russell 2000 has struggled to bounce back. Everything we have tracked since before the beginning of March, like rising yields, valuations, the dollar, and inflation expectations, has not changed.

Why the market has rallied, it appears to be due to quarterly rebalancing, which has now passed, and monthly inflows. The first day of every month except January has seen the S&P 500 rise by 1% or more since November. At the very least, every month since June, except for January, has had a positive first day. But the first few days of the month are not always a predictor of where the rest of the month of goes.

The job report on Friday was much worse in the bull case than it might seem. Fed Futures are now pricing in as many as one rate hike by the September 2022 FOMC meeting and as many as two rate hikes by the December 2023 FOMC meeting. That's a big change in the positioning of the market just since the middle of February.

To this point, the Fed called the bond markets bluff, and the bond market blinked. With rates on the long end of the curve settling around 1.7% on the 10-year. However, we have seen a significant move higher in yields in the middle of the curve, with the 7-year note rising the greatest amount, followed by the 10-year, the 5-year, and the 30-year. At this point, rising rates do not seem to be easing by much, and the FOMC minutes on Wednesday and PPI could present another opportunity for rates to reposition again. Still, the current position and the risk the bond market poses

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Mott Capital Management profile picture

Mott Capital is managed by Michael Kramer, a former buy-side trader, analyst, and portfolio manager with 30 years of experience tracking market fundamentals. He focuses on long-only macro themes and studies trends and unusual options activities to identify long-term thematic growth opportunities. Since its inception in 2016, the Mott Capital Management portfolio is up 115.4% using the fundamentals and macro trend-based approach to trading.

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Comments (51)

marcel55555 profile picture
sell sell sell
@marcel55555 , Sell everything?
Agree with the conditions cited in the article particularly regarding a loose fed, higher taxes and regulatory changes. The market is looking too much to liquidity and demand and not enough at intrinsic value. Recipe for a significant pull back.
@linkdonald , The big question is when will the pullback start?
@kimbillro While they don't ring a bell, I would suppose it will be when some government or large corporate action that is perceived as a macro negative is as good a guess as any. The recent fiasco with Credit Swiss is a bit of a foretaste.
Salmo trutta profile picture
@kimbillro pullback

which one?
As an investor or a PM you better have written yourself a pandemic and post pandemic playbook and thrown you old one out. Nothing from the past will help unless you go back to 1918-20 and seen what behavioral patterns were during the last pandemic. Read todays Fed minutes and if you believe them, and why wouldn't you? get yourself a SP 5000 t-shirt. Pain trade is higher, too much underinvestment and negativity and of course $. Throw all your charts out, all they do is muddle your brain.
@Peter J McGee , The money printing and government spending are unprecedented in the USA during peacetime.
@kimbillro So will the rally be in stocks, you ain't seen nothing yet.
@Peter J McGee , So far it is happening.
Well answer this, I'm told via another thread that as long as the Govt keeps pumping Trillions into the economy, that Valuations, Profitability, and Real growth doesn't matter and the market will continue going up. Think his two-year target on S&P was 6K. This seems counter-intuitive to what little I know about econmoics, but as stated, what I know is very little. So in our current environment, where stimulus and free money seems to be a given, do valuations actually matter anymore? **Disclaimer, I am a bull turned Bear, but questioning my decision to switch sides.
AAA Investments - PayONLY4Performance profile picture

Yes, liquidity is KING.

Valuations really don’t matter in this current environment...in fact, they haven’t for multiple years now.

Scary times indeed...
@klonk33 , And government printing, spending, and borrowing is QUEEN.
Anwar Salem profile picture
@kimbillro @klonk33 @Murrs700 In my little research I did, this is the definition of Banana Reptilic
Market knows there will be a corporate tax increase. Market knows about FF rates increases coming in '22 or '23. Market knows with global issues, interest rates will stay low on a relative basis forever. Market knows the US Fed is running a stealth MMT. Market knows it time to be a stock picker not a passive investor. How do it know? Because it does. "Up, up and away in my beautiful balloon" but you better pick the right ride.
@Peter J McGee , The unknow are any coming corporate tax increases. They can just print the money.
@kimbillro MMT all the way. But since Congress does not understand it they will raise corporate taxes, most likely a compromise at 25%
@Peter J McGee , Can someone simplify it for Congress by drawing a simple cartoon?
Not a Kodiak, or grizzly, or black, brown, polar or cinnamon. Nope, Mott is a perma bear.
@howier , You left out the Sun Bear in South America.
until retail panics and the 1% take profits its up
Good data and commentary.
Huh? Really? Thanks for letting us know!
as if anybody still cares about valuations. Mike is bitcoin overvalued?
@POLO.olop , Yes, Bitcoin is way overvalued even at $1.00.
Salmo trutta profile picture
In an accounting sense, the FED has an unlimited capacity to lend. It no longer operates under no reserve or reserve ratio constraints. Nor does it need to be concerned with a new outflow of funds as a consequence of its lending activities. Advances to borrowers simply involve crediting the borrower's interbank deposit account. These accounts are not "high powered money" when the remuneration rate exceeds money market funding yield curve rates.
@Salmo trutta , Yes, there is no limit to the Fed's balance sheet.
Salmo trutta profile picture
The trade deficit gap is being filled by new investment:

In 2020, the U.S. trade deficit was $678.7 billion, according to the U.S. Bureau of Economic Analysis (BEA). The U.S. imported *$2.8 trillion of goods and services*, which is down $294.5 billion from 2019. Exports were at $2.1 trillion, which is $396.4 billion less than 2019.

That 2020 trade deficit is higher than in 2019 when it was $576.9 billion.2 The COVID-19 pandemic had a dramatic effect on imports and exports.

While large, the deficit is still less than the record of $763.5 billion in 2006.
@Salmo trutta , The trade deficit does not bother the bull stock market.
So the market has overbought overestimating the earnings that will arise; this will not be one of the biggest economic reflations ever, the pent up demand isn’t all *that* big, and we should measure this rebound to steady state averages from the past which was covid free. An economic collapse that makes GFC look like walk in park is in fact a walk in park? Lol. Disagree
Salmo trutta profile picture
Foreigners are not yet sated with equities. Why would a Japanese investor buy Japanese stocks when he could buy U.S. stocks?
@Salmo trutta , It probably doesn't matter which stocks they buy. They can get a much higher yield buying US bonds.
Just keep buying the right stocks it doesn't matter where an index goes. And that take a lot of patience.
lebedevil profile picture
This market is just. getting. started.


Feels like 1997. 4-8 more years. DOW 50,000.
Salmo trutta profile picture
@Phil Dumfee re: "feels like"

Until money flows turn south, stocks will continue to fly higher.
@Salmo trutta , The only thing that can stop Fed printing is much higher inflation and a Congress that stops deficit spending.
CVS, PFE, MRK, BMY, T, etc, continue to be at reasonable levels. I added some to my Dividend portfolio.
shaderhacker profile picture
Yup. Agreed 100%. And not the tech stocks either. They already got battered in Feb/March. This is Dow and S&P. All the reflation stocks. I wonder what they are going to do in the next month seeing as though they can't keep going higher everyday. They already rotated out of tech.
Pyraminsider profile picture
Lots of old SA articles with mostly technical indicators calling for a down leg back in February. The Nikkei has had three down legs with three market peaks since. Dow and S&P are technically over bought but bullish market sentiment is at an all time high. You could have a 6.5% pull back from yesterdays high on the Dow before the end of April and it wouldn't even be noticeable on the monthly chart.

Pure speculation but IF there was an 8 day down leg followed by 10 days back up in April it might bring in some new money from the side lines. Of course after 8 days there might be a lot of talk about price trend reversal that would need to be sorted in May.
@Pyraminsider , Are you looking for 8 days down?
Thanks for the write up.
Does a bear poop in the woods? Does Mott post overly sobering bearish takes only?
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