Thursday, April 29, 2021
Stocks have soared, which has many worried that stocks are expensive. Although this is true, it isn’t that simple. This week in the LPL Market Signals podcast, LPL Research Chief Market Strategist Ryan Detrick and Equity Strategist Jeff Buchbinder discuss why stocks might not be as expensive as many think, while also talking about higher capital gains taxes on the wealthy, the economy continues to improve faster than anyone expected, and what to be watching for this week. Also, Ryan breaks out some more talking dog jokes.
How overvalued are stocks? One of the big worries lately is stocks are as pricey as they’ve been since the late 1990s. The S&P 500 Index is trading at price to earnings ratios (PE) multiple of 22 times forward earnings for the next 12 months (FactSet). The LPL Strategists did point out that using 2022 earnings, it drops to 20, but this is still well above the 17 average since 1980. Here’s the catch though—when you factor in extremely low rates, stocks are actually more reasonably justified. The truth is stocks might be expensive, but bonds are historically expensive, so looking at them together does show a fuller picture. It doesn’t stop there though, as the Strategists noted when inflation is low (like it currently is), you tend to see higher multiples as well, as higher inflation reduces the value of future profits and cash flows.
Let’s talk about higher capital gains taxes. Stocks tumbled last Thursday when it was announced the Biden administration was considering a massive hike in capital gains taxes on the wealthy. As the LPL Strategists discuss, this shouldn’t have been a surprise at all—in fact, this is exactly what President Biden ran on last year. Cooler heads prevailed on Friday, with the realization that there is very little correlation between tax rates and equity returns. In fact, as the Strategists noted, what matters more is the economic cycle—which in this case is still young and improving.
U.S. Dollar and economic round up. The LPL Strategists finish things up with a discussion of why LPL Research continues to expect a lower U.S. dollar (hint – massive budget deficits), while also discussing the record-breaking earnings season and what to expect from the Federal Reserve (Fed) at this week’s Federal Open Market Committee (FOMC) meeting.
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