Stock Market Correction Ahead? Not So Fast
NEW YORK (TheStreet) -- After another banner year for stocks, investors, pundits and market strategists are wondering if stocks have gotten ahead of themselves and are (finally) going to reverse course as a long-anticipated correction materializes.
I say, not so fast.
Yes, over the past two years, since Jan. 1, 2012, the S&P 500 has risen over 45% -- an improbable feat, and certainly a lot more than I, whose often been criticized for being too bullish, had expected.
But are stocks really more expensive than they were in 2012? It depends which measures you look at. For example, if you focus on the S&P's Price/Earnings (based on trailing, or historical earnings) ratio, which currently stands at 18.95, you see it is well above last year's 17.39 and the long-term historical median of 14.51.However, other valuation metrics aren't quite so clear. For instance, the current Earnings Yield of the S&P 500 is 5.13%, below its historical median yield of 6.89%. The dividend yield of the S&P stands at 1.96%, well above its average over the past 30 years. Moreover, earnings are rising, more than doubling since 2008.
As you can see from the chart above, which uses data from Bloomberg, Goldman Sacks and Barclays Capital, prices and valuations are up, but they are certainly nowhere near record highs. There is no question that investors should prepare themselves for a short-term pullback. However, it would be a mistake to try to time such a market move. We all know that markets are forward-looking mechanisms. In my opinion, as the U.S. economy continues to recover and corporate earnings rise, valuations will become more attractive. According to FactSet, a well-regarded research firm, the Wall Street consensus estimate has S&P (forward) earnings rising to just above $120 (in the aggregate for a weighted average basket of the S&P 500 stocks), putting the forward P/E of the S&P 500 just over 15, cheap by historical standards. One more reason to be bullish: As our economy continues to improve, the Federal Reserve pulls back on quantitative easing and interest rates continue to slowly rise, I believe corporations will sharply increase capital expenditures. An increase in capital expenditures -- capex -- will raise the future earnings outlook and could help propel stocks higher still. The bottom line: When the market corrects by a few percentage points, I'll be buying, not selling. To me, the long-term outlook for corporate America and its shareholders is pretty bright. At the time of publication the author had a position in equities mentioned. Follow @Opursche This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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