US stock market indices are trading near all-time highs and many market observers are highlighting valuation measures that are reaching levels last seen during the dot-com era. The bellwether S&P 500 is currently approaching a forward price to earnings ratio of 26 times consensus earnings while other key metrics such as price-to-cash flow and price-to-book are also well above their long-term trends. This is a cause of concern but not necessarily alarm even as valuations stand at premiums compared to the rest of the developed world. The Fed model which compares the S&P earnings yield to the yield on BAA US Corporate Credit is registering readings near its long-term average after reaching extremely attractive levels at the onset of the pandemic. A major tailwind for US equities is likely to be a continued benign interest rate environment heading into 2021 and perhaps beyond. The US Federal Reserve has signaled accommodative policy conditions perhaps reaching well into 2022 and fiscal policy remains supportive as well. Both policy positions should be supportive of US stocks in the intermediate term. [chart courtesy Bloomberg LP © 2020]
