| NEW YORK, March 15
NEW YORK, March 15 Major U.S. stock indexes have
never been higher - and yet that's hardly scaring people.
Stocks have soared in 2013, with the Dow climbing
almost 11 percent to hit a series of new all-time highs while
the S&P 500 has jumped 9.4 percent, falling just short of
its all-time closing high after rising for 10 of the past 11
weeks. And yet, analysts for the most part see equities as
The rally has slowed, however. In the last eight trading
sessions, the S&P 500 has managed a daily gain of more than 0.5
percent just once. Questions remain about the potential impact
of U.S. budget negotiations or the Federal Reserve's plans in
continuing its massive monetary stimulus. The Fed meets next
Taken on its own, analysts see potential for more gains in
the U.S. stock market, based on metrics like earnings prospects
and valuation. The forward 12-month price-to-earnings ratio for
the S&P 500 is currently 13.5, which is about 9 percent less
than the October 2007 ratio of 14.8 when the S&P last hit a
"This shows that stocks are cheaper than they were at the
time of the last high, and at the same time, alternative assets
like bonds are much more expensive," said Paul Zemsky, head of
asset allocation at ING Investment Management in New York, who
helps oversee $170 billion. "We are at record levels, but you
need to look at stocks in the right context, and in that
context, they're not expensive at all."
The S&P 500's earnings yield - a reverse of the P/E ratio -
currently stands at 7.1 percent, compared with 6.41 percent for
the BofA Merrill Lynch US High Yield Index. That's an anomaly in
the markets - the earnings yield has generally been lower than a
benchmark junk-bond yield because it measures the risk of owning
the highest-quality stocks versus the expected return on the
The current P/E ratio is also below the historic average of
14.8, according to Thomson Reuters data dating back to 1968. The
S&P 500 would need to rise to about 1,647 to become in line with
the historic average - about 5.6 percent above current levels,
according to Standard & Poor's.
Interest rates remain near record lows while dividends are
growing, another way that stocks are outshining bonds.
In the most recent quarter, the average dividend yield for
S&P 500 companies was 2.19 percent, more than the 1.89 percent
yield in the fourth quarter of 2007, the period of the last
market peak, according to Standard & Poor's. In 2012, 403 S&P
500 components paid a dividend, the highest number since 1998.
In contrast, the 10-year U.S. Treasury note currently yields
2 percent, so the dividend yield on the S&P 500 would pay more
than the bond, without even factoring in potential price growth.
WHERE SHOULD STOCKS BE?
The S&P 500 is also trading well below its intrinsic value,
another metric of earnings-based valuation that estimates where
a security should trade, based on its expected growth trajectory
over the next decade or more.
The index is seen as having a price to intrinsic value ratio
of 0.85, according to Thomson Reuters StarMine, which means it
would have to rise 15 percent to be in line with its earnings
growth trajectory. More than two-thirds of companies are below
their intrinsic value, including some of the biggest.
Apple Inc, which has tumbled 16.6 percent this
year, is 28.2 percent under its intrinsic value, based on its
Friday closing price, while Exxon Mobil Corp is 23.3
percent under and Bank of America Corp is 53.3 percent
under its intrinsic value.
Other companies show signs of being overbought. Google Inc
, which has jumped about 15 percent so far this year, is
about 16 percent higher than intrinsic valuation. Amazon.com Inc
is 85 percent above its intrinsic valuation of $39.17.
"You need to be selective. While on the whole, we're in a
constructive market supported by dividends and earnings, some
companies have probably seen peak levels already," said John
Carey, portfolio manager at Pioneer Investment Management in
Boston, which has about $200 billion in assets.
The market's gains this year have come on accommodative
monetary policy from the Federal Reserve and strong corporate
results, two factors that investors don't see going away any
The Federal Reserve's interest-rate-setting committee meets
next week. Despite calls from some of the board's more hawkish
members to reduce asset purchases, the Fed is expected to
continue on its current path.
Recent data - ranging from retail sales and manufacturing to
employment - has shown the economy is picking up some momentum.
But the high U.S. unemployment rate of 7.7 percent gives the
policy committee room to keep buying $85 billion a month in
bonds to keep interest rates low.
And while the stock market's two previous peaks were
followed by recessions stemming from the bursting of the dot-com
bubble in 2000 and the 2008 credit crisis, there is no apparent
"I don't see anything that looks like a speculative bubble,
and there's no sign of the euphoria that marks the end of a bull
market," said Ken Fisher, who oversees $46 billion at Fisher
Investments in Woodside, California.
(Wall St Week Ahead runs every Friday. Questions or comments
on this column can be emailed to:
(Editing by David Gaffen and Jan Paschal)