As the stock market resiliently pushes ahead despite the lack of clarity on many fronts, investors are debating the sustainability of the rally. An economist is of the view the upward momentum will likely remain intact.
“The market could be in for new highs, this is such a strong market. Companies are now much more confident in issuing guidance and internals are improving,” said Wharton professor Jeremy Siegel in an interview on CNBC’s Closing Bell on Friday.
“The employment cost index for the second quarter, an inflation measure, came in below expectations. It is the “Goldilocks scenario” of lower inflation, a stronger economy, good guidance, and good profits. What’s to stop this market now?” Said the economist.
According to the Yahoo News, the inflation figures for June were just right, and they’ve set up the ideal environment for stock investors, as per the Wharton professor Jeremy Siegel’s opinion. The top economist pointed to easing inflation, with prices rising 3% year-over-year last month, per the June Consumer Price Index report. That’s well below the 41-year-record above 9% notched last summer, and a sign that the Fed’s tightening efforts are working to cool the economy.
Siegel said he is pleased about the fact that Federal Reserve Chair Jerome Powell acknowledged that there are two-sided risks. “Every meeting is a live meeting. There is no preconceived notion about whether they are going to go up or down there, the Fed is going to look at the data,” said the economist.
Siegel said he was concerned about what is to befall the economy in the second half when the money supply went down and decelerated by the greatest rate in history. He also conceded that the over 2% growth in the first half came as a surprise.
“So inflation coming down, stronger economy. I don’t see this stopping anytime soon,” said the economist.
When asked about whether current elevated valuations are justifiable, Siegel said the S&P 500 is trading at 20 times the next 12-month earnings. “That’s about average,” he said, citing his research.
“Tech stocks are trading at 30 times earnings, and the value and cyclical stocks, so fearful of inflation, are trading at 14, 15, or 16 times. That’s extremely reasonable. One may argue that the tech stocks are a little bit over their skies in terms of how far they have gone, I would prefer the value stocks for the long run. However, when I look at this market as a whole, I do not see any significant overvaluation” said Siegel
He noted that back in the dotcom days the S&P 500 was trading at over 30 times earnings in a much higher interest rate environment than currently. “That was scary. I don’t regard today’s valuations as scary,” he said.
Produced in association with Benzinga
Edited by Eunice Anyango Oyule and Judy J. Rotich
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