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Stop worrying—stocks are pricey for good reasons

Is the stock market priced for perfection? It sure is, but with these data points it makes sense for stocks to be pricey:

  1. Geopolitics: lower risk, now that the French election is over.
  2. Earnings: above expectations for both Europe and the U.S., and full-year guidance has been strong.
  3. U.S. economy: With April's strong jobs report, it's looking likely that the first quarter's weak numbers are (once again) an anomaly, and the Fed is looking more prescient by calling that Q1 data "transitory."
  4. Federal Reserve: The economic data is good, but not too good. The Fed is essentially out of the picture. Traders are expecting two rate hikes and nothing that has happened recently has changed that view.
  5. Tax cuts: are now in play.

This is a rare confluence of events — lower risk right across the board. It's not surprising that world markets are at new highs:

Global stock markets

U.S.: historic high
Germany: historic high
France: multiyear high
Japan: 16-month high
Emerging markets (EEM): 23-month high

Is the U.S. market expensive? Sure, by historic standards. Stocks have a very good correlation with forward earnings estimates. According to FactSet, the forward P/E estimate for the S&P 500 — which includes the last eight months of this year and the first four months of 2018 — is 17.5 (2,396/$137.04 = 17.5). The 20-year average is 16.0, so the current estimate is above average, but not dramatically so.

It's also not surprising that with these kinds of data points we are getting markets at new highs, but traders are whining about the low volume and low volatility. Again, this is not shocking: prices are too high to make buyers enthusiastic, but sellers are not enthusiastic either because everyone believes that a modest drop in the market will only be met with more buying.

Emmanuel Macron wins the French Presidential Election
Patrick Aventurier | Getty Images
Emmanuel Macron wins the French Presidential Election

Finally, for everyone who keeps asking me why I am spending so much time on European earnings and the economic state of Europe, it's pretty simple: many people own Europe through ETFs now, and U.S.-based companies get a significant portion of their revenues from Europe.

By "significant," I mean roughly 15 percent or above:

High Europe exposure
(% revenue from Europe)

Priceline: 76 percent
Philip Morris International: 41 percent
Mondelez: 37 percent
eBay: 37 percent
McDonald's: 32 percent
ExxonMobil: 32 percent
Hewlett Packard Enterprises: 26 percent
Merck: 22 percent
Yum! Brands: 22 percent
Goldman Sachs: 21 percent
Amazon: 20 percent
United Technologies: 19 percent
Apple: 17 percent
3M: 16 percent
PepsiCo: 14 percent

Source: UBS

The lesson here: Europe matters for U.S. investors!

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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