Is the stock market priced for perfection? It sure is, but with these data points it makes sense for stocks to be pricey:
- Geopolitics: lower risk, now that the French election is over.
- Earnings: above expectations for both Europe and the U.S., and full-year guidance has been strong.
- 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."
- 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.
- 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.