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Should Investors Fear Current Stock Valuation?

Posted on: June 18, 2021

As COVID vaccination rates start to reach significant levels across the US, Canada and Europe and economic recovery gathering steam, global stock markets have had strong rebounds and we’ve seen a sharp jump in inflation numbers. The two biggest questions on investors’ minds now are, has the stock market become over-valued and are we on the verge of a prolonged resurgence of inflation, which could have a significant impact on interest rates and the stock market.
Both are very important questions and we will look at each individually in separate posts, starting with the question of market valuations.

Stock markets have undoubtedly had a good run since last year’s sell-off and the US S&P 500 now trades above 20X earnings. However, our colleague, Chief Investment Strategist of BMO Capital Markets Brian Belski in a recent research report makes two very important points:
  1. Trailing 4Q EPS growth not expected to peak until Q4’21 and even then, growth is expected to remain above 10%.
  1. The average trough-to-peak earnings growth cycle lasts 22 months.
His conclusion: Market strength may ease, but elevated growth still suggests solid.
 
Ian and I concur that we are in a period of recovery and investors should not be afraid to buy stocks now (subject to their own investment objectives and comfort with risk). Our advice to investors is not to look at it as a “stock market,” but as a “market of stocks” and we continue to find high quality companies we feel still have attractive fundamental values and offer significant growth potential over the next several years.

Thanks for reading this post, and if you have any questions about your own investments or strategy, please don’t hesitate to contact us.

Next week, we’ll look at the recent higher inflation and what it potentially means for the longer term interest rate outlook and stocks.
 


Source: BMO Capital Markets - US Strategy Comment Report dated June 17, 2021
 

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