Photo: Charlie Rose via YouTube
U.S. economic data has been improving notably. And the U.S. stock market is near its all time high.However, Goldman economist Jim O’Neill is getting increasingly concerned that the stock market is getting expensive.
In the near-term, he thinks momentum could drive stocks higher. But we warns that valuations are getting rich.
From his latest Viewpoints note:
The strength of last week’s US data is leading the consensus to revise upwards their forecasts for 2013 real GDP. Having been notably higher than the consensus since autumn 2012, GSAM is rather pleased about that as a number of investment strategies have prospered from it. Of course, and as I discussed last week and in recent Viewpoints, this is despite the ongoing and sometimes unchosen fiscal tightening in the US, and is a marked contrast to Europe. Not surprisingly, all of the US bond, equity and currency markets are reacting accordingly. I am not that confident about what happens next and as to whether all these trends are going to continue, not least because May is now less than two months away and the infamous “Sell in May and go away, come back on St Leger’s Day” (which I am physically actually going to be doing post retirement, of course!). US equities seem set to strengthen further in the near term, given the momentum in the data, but as page 47 shows, they are hardly bargain basement these days from a CAPE perspective. As for bonds and the Dollar, the market is adjusting its future profile for the Fed and starting to think that the Fed will have to change its own views, but I am not sure, in light of the actual (and prospect of more) fiscal tightening means the Fed will jump too soon, especially given their output gap views and the strength of conviction of their leading players. Of course, if this data improvement continues, then the Fed will have to adjust.
CAPE is short for cyclically adjusted price-earnings ratio, which divides the S&P 500 by 10-year average earnings. At 23.6, the U.S. CAPE is well above the long-term average of 18.7.
The chart he references comes from his presentation at the Ambrosetti Financial Markets Workshop.
Photo: Goldman Sachs Asset Management
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