Trading Nation

Don’t look now, but stocks may be getting overvalued

Are stocks getting overvalued?
Are stocks getting overvalued?

The has enjoyed a great run over the past month, rising more than 3 percent and hitting a record high.

The bad news is that the market run has come mostly on the back of rising valuations — and at this point, some warn that stocks are getting overvalued.

"I'm a little concerned that we're getting a little pricey, a little rich," Erin Gibbs, equity chief investment officer at S&P Global, said Monday on CNBC's "Trading Nation."

Gibbs points out that the S&P has generally been trading in a range of between 15.5 and 18 times expected earnings over the next year. And with the market currently trading at a forward price-earnings ratio of about 17.4, "we're close to the top of that trading range," she said.

The upshot is that investors appear to be expecting earnings growth either to beat analysts' estimates in the coming year, or to continue to strengthen in the years ahead. Of course, it is also possible that less fundamental reasons are driving stocks higher, such as a desire to hedge against expected inflation, or merely to improve portfolio performance by chasing stocks higher.

Either way, Gibbs believes that a bit too much optimism has been baked into large-cap stocks.

"I'm not necessarily saying that markets need to go down, but I would expect to see some consolidation between now and the end of the year," she said.

At the very least, December won't prove to be as sweet as November, in her opinion.

Yet others warn against overthinking moderate changes in market valuation.

"Yes, we are near-term overbought," Ari Wald, head of technical analysis at Oppenheimer, concedes. "But not to miss the forest for the trees, we do think the longer-term trend here is bullish for the S&P 500."

"The charts are telling us that higher valuations are justified, and a repricing is needed for the market," he said Monday on "Trading Nation."

Specifically, stocks that tend to rise along with the market are doing well, and names that tend to be less volatile are lagging.

This would seem to indicate that investors are becoming more comfortable with taking risk. And hence, to Wald, higher valuations will not stop investors from continuing to buy stocks.