US Stock Market Outlook

With past financial bubbles still fresh in investors’ minds, there is more than a little anxiety that the S&P 500 has gotten ahead of itself

Matthew Coffina, CFA 30 December, 2013 | 4:21PM
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The US stock market seems to be testing new highs by the day. As of this writing, the S&P 500 has delivered a total return of 27.5% in 2013. With past financial bubbles still fresh in investors’ minds, there is more than a little anxiety that the market has gotten ahead of itself.

To be sure, there are rare occasions when the market gives clear signals that it is either massively undervalued or overvalued. In late 1999, experienced investors recognized that stock valuations had become completely disconnected from reality—especially in the technology sector—and it made sense to raise cash. In late 2008 and early 2009, it was fairly obvious that most stocks were very cheap in any scenario other than a complete meltdown of the global economy. The median stock in Morningstar’s coverage universe was trading at an incredible 45% discount to our fair value estimate at that time, and it made sense to double down on equities.

However, these are more the exceptions than the rule. The vast majority of the time—including now—the market’s valuation is simply too uncertain to make drastic portfolio changes in response. Some investors believe that we are still in the early stages of economic recovery, with significant pent-up demand and underutilized capacity that will drive robust economic and earnings growth in the coming years. Other investors argue that profit margins are at unsustainable highs, P/E ratios are inflated if you use a longer-term average of earnings, and the market is only being held afloat by the Federal Reserve’s exceedingly loose monetary policy.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Matthew Coffina, CFA  is a stock analyst at Morningstar.

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