Goldman Sachs: S&P 500 and the "Seven Sisters" have all risen too much!
Goldman Sachs warns that the future 6-month return rate of the S&P 500 will significantly decrease. The current valuation level is already close to the high point in January 2022. The previous round of selling triggered by inflation started from a similar high point
From the technology "Seven Sisters" to cyclical stocks, the breadth of the US stock market's rise has significantly improved, with Goldman Sachs warning that the valuation bubble is getting bigger.
On Tuesday, Goldman Sachs pointed out in its latest report that the overall valuation bubble of the US stock market is gradually expanding. The expected price-earnings ratio of the S&P 500 index, calculated on an equal-weighted basis, has risen to 17 times, with a 13% premium over fair value. In the near future, the US stock market may face significant adjustment pressure.
Goldman Sachs stated:
In recent times, the "Seven Sisters" of the US stock market have been leading the index's rise, driving up the valuation of the S&P 500 index. By the end of last year, this equal-weighted index had only risen by 11.7%, while the market-cap weighted index of the "Seven Sisters" had risen by 24.2%.
However, since the beginning of 2024, the average valuation of the S&P 500 component stocks, calculated on an equal-weighted basis, has also surged. As of Monday morning, the "Seven Sisters" have risen by 6.9% since January 1st, while the market-cap weighted S&P 500 has risen by 10.1%.
When the equal-weighted index valuation exceeds its assessed fair level by 10%, it usually takes about 4 months to peak, but this index crossed this threshold in February.
High valuation does not necessarily lead directly to a stock market decline. Historical data shows that an excessively high valuation state generally lasts around 10 months, often gradually dissipating the valuation bubble under the impetus of improving earnings. It is only when economic growth weakens that it may trigger a wave of investor selling.
Goldman Sachs warned that a common consequence of high valuation is that the index's return rate over the next 6 months will significantly decrease. Specifically, after entering the range of valuation exceeding 10% above fair level, the return rate of the equal-weighted S&P 500 index in the next 6 months will shrink to 2%.
At the same time, Goldman Sachs also pointed out that traders currently expect the price-earnings ratio of the S&P 500 in 2024 to be 21 times, higher than the 5-year and 10-year average levels, approaching the high point of January 2022. The previous round of inflation-driven selling waves started from a similar high point