By one measure, the market is now more expensive that it has been since just after the dot-com bubble popped. Some strategists are concerned about stocks trading at such multiples, but others say earnings growth is somewhat justifying current valuations.
The S&P 500's forward price-earnings ratio just hit its highest level in 13½ years, according to a new report from Bank of America Merrill Lynch. The forward P/E ratio expanded in July to 17.7 times, from 17.4 times, according to the equity and quantitative strategy team led by Savita Subramanian.
This development came as the valuation backdrop remained the same, the strategists wrote, as U.S. stocks continue trading above "nearly all metrics we track, but equities continue to look attractive relative to bonds." Across sectors, all but two — industrials and consumer staples — saw multiples expand in July.
Yet the S&P 500's forward P/E ratio would have to touch about 19 times to appear "peakish" and give investors real reason to get nervous, said Erin Gibbs, portfolio manager at S&P Global.
Fueling her optimistic outlook is the healthy earnings expected for this year and next; she is expecting double-digit earnings growth this year and next.
Current multiples are high on a historical basis, but multiples are a "poor sell signal," said Samuel Rines, chief economist and global macro portfolio manager at Avalon Advisors. Market valuations have been a frequent topic of discussion in client meetings, Rines said. He said earnings are indeed growing at a rapid clip, and there remains the chance of tax reform that may further benefit the market, though such a development appears "increasingly less likely."
Rines said he would become more concerned about the market's current multiples if interest rates rise (which they are forecasted to do in this current Fed cycle of tightening), if the dollar's strength rises or if there is a deterioration in the current "positive global growth backdrop."
"If interest rates rise, it may become a problem for [big tech stocks] as the discount rate would rise on their earnings. This should lead to multiple contraction. A stronger dollar would be a hit to foreign sales and the bottom line for US multinationals (again). Similar to a strong dollar, slower global growth would suppress earnings growth," Rines said in an email Thursday to CNBC.
At this point, valuations are somewhat of a concern to Bill Baruch, senior market strategist with iiTrader, who told
CNBC's "Trading Nation" that the market has gotten "a little ahead of itself." The market is getting "tired out" at these levels, he added, meaning he would consider backing away from stocks.
On a technical level, the market would need to come down at least 5 percent in order for Baruch to feel more confident in the S&P 500 trading at these heights.
The S&P 500 posted its second-worst trading day of the year on Thursday.
