Market Insights is a piece in which Kensington’s Portfolio Management team will share interesting and thought-provoking charts that we believe provide insight into markets and the current investment landscape.
In the current market landscape, it’s becoming increasingly clear that "everything is expensive." Elevated valuations across both US equity and fixed income markets underscore the need for caution and adaptability. Although this doesn’t imply an imminent correction, it highlights the importance of vigilance and flexibility for investors navigating today’s environment.
The Elevated Landscape of US Equity Markets
US equity markets continue to reach new highs, driven by strong performances in large-cap and technology stocks. The S&P 500, for example, has hit a record high 50 times this year, making 2024 one of the most record-setting years since the index's inception (see chart below).
Source: S&P Dow Jones Indices. Data as of Nov. 8, 2024. Chart is provided for illustrative purposes only.
Past performance is no guarantee of future results.
This trend raises questions about sustainability, especially as valuation metrics show stocks are expensive relative to historical norms (chart below). On a price-to-sales basis, the market is near levels last seen during the post-COVID surge in 2021. Similarly, the price-to-book ratio is approaching levels not seen since the dot-com bubble. These indicators suggest valuations are stretched, potentially limiting further upside without substantial earnings growth.
Source: Bloomberg as of September 30, 2024
While much of the run-up in S&P 500 valuations can be attributed to specific sectors—particularly Information Technology—the broader reality is that 10 out of 11 sectors are trading at multiples exceeding their 25-year averages. The aggregate P/E ratio for the S&P 500 stands at 22.2, well above the historical average of 16 (see chart below).
Source: FactSet as of November 8, 2024
Fixed Income Markets: Low Spreads Highlight Broad-Based Expensiveness
The fixed income market also reflects expensive valuations across both high-yield and investment-grade bonds, signaling a low-risk premium for investors. As shown in the chart below, high-yield spreads are at their lowest levels in 17 years, meaning investors receive minimal compensation for taking on higher credit risk. This compression typically signals optimism in the economic outlook but also heightens the risk if economic conditions weaken.
Source: Bloomberg as of November 12, 2024
Investment-grade bond spreads have similarly dropped to levels not seen since 1997. The low spreads across both high-yield and investment-grade sectors indicate a challenging environment for bond investors, who are paying high prices relative to historical averages. When both high and low-risk bonds offer reduced spreads, the fixed income market as a whole appears "expensive," providing limited compensation for risk.
Source: Trading View as of November 12, 2024
Although 10-year Treasury yields have recently risen (4.43% as of November 11, 2024), this does not necessarily counter the narrative of expensiveness; rather, it reflects an atypical relationship in today’s market. While high Treasury yields may offer some return potential if there’s a retracement, they underscore the elevated prices investors are paying across the board. This makes it crucial for investors to approach the bond market cautiously, as current valuations provide little buffer in the event of economic downturns or credit stress.
Considering the Other Side: Market Momentum as a Buffer
While current valuations indicate caution, recent insights from Doug Ramsey at the Leuthold Group offer a counterpoint: strong market momentum could serve as a temporary “inoculation” for the economy. The S&P 500’s rare nine-week winning streak in late 2023, combined with a trailing 12-month gain of 36%, places it in an elite historical category associated with continued economic expansion. Over the past 100 years, no recession has followed a trailing 12-month gain above 35%, suggesting that robust market performance may provide short-term economic stability (chart below).
Source: Leuthold Group as of November 6, 2024
Additionally, market breadth remains strong, with the NYSE Advance/Decline Line recently reaching an all-time high. Over the past 70 years, only two bull market peaks (in 1980 and 1987) occurred when the S&P 500’s trailing one-year gain exceeded 30%. Unlike those periods, however, today’s strong breadth suggests broad participation and liquidity support (see chart below).
Source: Leuthold Group as of November 6, 2024
Conclusion: Navigating an Expensive but Resilient Market
Today’s market presents a complex picture: valuations across equities and fixed income are undeniably high, suggesting a limited margin for error and heightened sensitivity to economic shifts. At the same time, recent market momentum offers a counterbalance to this caution. Historically, powerful rallies like the current one in the S&P 500 have often supported economic resilience in the short term, with strong 12-month gains coinciding with continued economic expansion rather than recession.
In this dual environment, investors are best served by a flexible approach. While high valuations warrant caution, the market’s momentum may provide a stabilizing force. Staying adaptable allows investors to manage risk amid high valuations while remaining open to the possibility that strong momentum might extend the economic cycle. This combination of caution and flexibility can help navigate the opportunities and risks in today’s expensive yet resilient market.
Click below to subscribe to our Insights!
Receive email notifications when new articles are published
Disclaimer
Investing involves risk, including loss of principal. Past performance does not guarantee future results. There is no guarantee any investment strategy will generate a profit or prevent a loss.
This is for informational purposes only and is not a recommendation nor solicitation to buy, sell or invest in any investment product or strategy. Our materials may contain information deemed to be correct and appropriate at a given time but may not reflect our current views or opinions due to changing market conditions. No information provided should be viewed as or used as a substitute for individualized investment advice. An investor should consider the investment objectives, risks, charges, and expenses of the investment and the strategy carefully before investing.
Kensington Asset Management, LLC (“KAM”) relies on third party sources for some of its information that we believe is reliable. However, we make no representation, warranty, endorse or affirm as to its accuracy or completeness. The information provided is current as of the date of publication and may be subject to change. We are not responsible for updating this information to reflect any subsequent developments or events.
Certain information contained herein constitutes “forward-looking statements,” which can be identified using forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results, or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation as to the future.
Advisory services offered through Kensington Asset Management, LLC, Barton Oaks Plaza, Bldg II, 901 S Mopac Expy – Ste 225, Austin, TX 78746.
KAM20241113A