Forex
Lofty valuations on US stocks a growing worry for investors
Some Wall Street banks are sounding caution on the U.S. stock rally, warning that stretched valuations have made equities more vulnerable to declines.
The S&P 500 pulled back for the week though it is up more than 13% since the year began, fueled by signs of moderating inflation, excitement over advances in artificial intelligence and growing appetite for risk.
Those gains, however, have driven equities to more expensive levels. The S&P 500 now trades at 19 times its expected 12-months earnings, well above its historic average of 15.6 times, Refinitiv Datastream showed.
Similar valuation levels have preceded periods of rocky performance. Historically, the S&P 500 has experienced a median drawdown of 14% over the next 12 months when valuations stand at current levels or above, compared with a 5% drawdown over a typical 12-month period, Goldman Sachs said.
“With valuations now pushing the outer limits of what we would think would be reasonable. … We would be taking some chips off the table,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute (WFII).
Catalysts that could cloud the outlook include unexpected weakness in economic growth, the potential for the Federal Reserve to be more hawkish than markets have priced in, and a rebound in inflation, investors said.
WFII recently downgraded the technology sector, which has led this year’s S&P 500 rally, to “neutral” from “favorable,” citing “unattractive” valuations.
Goldman urged investors to consider “downside protection” to their stock portfolios, though they expect the S&P 500 to reach 4,500 by year-end, or about 3.5% above current levels.
Valuations are even more stretched for the Nasdaq 100, whose 36% rally this year has dwarfed that of the S&P 500. The index trades at nearly 27 times forward earnings estimates, compared to its historical average of 19.3 times, according to Refinitiv Datastream.
The earnings outlook for the high-growth companies that make up the Nasdaq 100 is more tepid than in 2021, when the index also rallied sharply, making it more challenging to justify high valuations, said Michael Purves, chief executive officer at Tallbacken Capital Advisors.
Despite the index’s towering gains, signs of weakness are emerging in technical indicators related to trends and momentum, Purves said.
“This whole wonderful momentum, FOMO trade, is starting to look a little long in the tooth here,” he said, using the abbreviation for ‘fear of missing out.’ “This is sort of like a yellow warning light flashing.”
Investors next week will be watching for more data on the economy’s health, including key inflation data on Friday, as the second quarter comes to an end.
Market participants have cited other reasons for caution, as some tailwinds that have supported stocks in recent months may be sputtering out.
One of these is positioning: investors fearful of missing out on gains have loaded up on stocks in the last several weeks. A measure tracked by Deutsche Bank showed the highest investor positioning in equities since January 2022.
While the rotation into stocks has helped buoy markets, it has also left less fuel on the sidelines to power further gains.
“Light positioning should no longer be a tailwind for the equity market,” Goldman’s analysts wrote.
To be sure, there are signs the rally could run further. The S&P 500’s over 20% move up from its October lows has convinced some investors that equities are now in a “bull market” phase, and history shows stocks tend to keep rallying after reaching the 20% threshold.
Areas such as industrials and materials have also outperformed this month, fueling optimism that the rally will expand beyond the handful of tech and other megacap stocks that have mostly propelled this year’s gains.
A broadening rally “should make investors feel a little bit more positive,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. But the index’s quick burst above its short and long-term technical trend lines could mean a pullback is coming, he noted.
“From a near-term perspective, investors should expect stocks to just cool a little bit.”
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
Forex2 years agoForex Today: the dollar is gaining strength amid gloomy sentiment at the start of the Fed’s week
- Forex2 years ago
How is the Australian dollar doing today?
- Forex2 years ago
Unbiased review of Pocket Option broker
- Forex2 years ago
Dollar to pound sterling exchange rate today: Pound plummeted to its lowest since 1985
- Cryptocurrency2 years ago
What happened in the crypto market – current events today
- World2 years ago
Why are modern video games an art form?
- Commodities2 years ago
Copper continues to fall in price on expectations of lower demand in China
- Forex2 years ago
The dollar is down again against major world currencies
