Yahoo Finance JPMORGAN: 3 things to think about amid 'quite high' stock market valuations
By Medha Singh and Devik Jain
(Reuters) - Wall Street gained on Wednesday with the S&P 500 hitting its highest in more than four months following a strong quarterly showing by Goldman Sachs and promising early data for a potential COVID-19 vaccine.
The U.S. lender jumped 1.4% as its trading revenue doubled in the second quarter, driven by big swings in stock and bond markets since March.
Morgan Stanley gained 0.6% and Bank of America 1.1% ahead of their results on Thursday, which would wrap up earnings from the big six U.S. banks. The broader banking index climbed 2.0%.
Energy, industrials and materials led gains among the major S&P sectors.
"We're being led by the cyclical investing which means people believe that the economy has reached a nadir and is going to start trending higher," said Robert Pavlik, senior portfolio manager at SlateStone Wealth LLC in New York.
Valuations are quite high: Three things to consider
The three main U.S. stock indexes have recouped most of their losses from the coronavirus-led slump, with a raft of stimulus measures and encouraging economic data lifting the S&P 500 to within 5% of its record high hit in February.
The weak near-term earnings backdrop combined with rising stock prices have sent market valuations to extreme levels, leading prominent investors like Mike Novogratz to warn of a bubble.
Other leading Wall Street strategists don’t see it that way.
“If we take a look at valuations just on a classical next-12-month basis, they are quite high at 22 times [earnings],” Gabriela Santos, Global Market Strategist for JP Morgan Asset Management, said to Yahoo Finance.
“But for us, it’s important to think about three things with valuation,” Santos added. “The first thing is I think we should write off 2020 earnings and start to think about valuation on top of more normalized 2021 earnings. That brings it down to about 18 times [earnings].”
With the second-quarter earnings season now underway, investors are looking for annual forecasts from marquee companies for signs of the pace of the rebound in Corporate America.
“The second thing is to think about it as a relative experiment with interest rates — the 10-year — below 0.7%,” Santos continued. “That makes the appeal of the earnings yield you can get on stocks more interesting.
“The third thing is just looking beneath the surface,” she said. “We have certain sectors that have recovered quite a lot — like tech, like the Nasdaq. But you also have a bunch of other sectors that are still actually in bear market territory. So for us, it’s about trying to find a better balance.”
Fear is easing
Wall Street's fear gauge eased for the second straight day after spiking on Monday amid a record surge in U.S. coronavirus cases.
"The market started off strong on the news that Moderna is finding some success in their interim phase one trials for a COVID-19 drug and the news from Goldman Sachs feeding by a wide margin," said Pavlik.
UnitedHealth Group Inc fell 0.3% after warning of rising costs later this year as Americans catch up on less urgent surgeries halted by the coronavirus pandemic.
Moderna Inc surged 12.4% after a small-scale study showed its experimental COVID-19 vaccine produced high levels of virus-killing antibodies, bolstering hopes the shot could prove effective in later stages of testing.
Travel-related stocks Carnival Corp, Royal Caribbean Cruises Ltd, Marriott International and Wynn Resorts rose between 7% and 11%, with the S&P 1500 airlines index up 6.4%.
At 10:49 a.m. ET, the Dow Jones Industrial Average was up 342.12 points, or 1.28%, at 26,984.71, the S&P 500 was up 38.89 points, or 1.22%, at 3,236.41. The Nasdaq Composite was up 114.95 points, or 1.10%, at 10,603.52.
Apple rose 1.6% after Europe's second-top court rejected an EU order to the iPhone maker to pay 13 billion euros ($14.78 billion) in Irish back taxes.
Advancing issues outnumbered decliners by a 6.41-to-1 ratio on the NYSE and by a 5.63-to-1 ratio on the Nasdaq.
The S&P index recorded 24 new 52-week highs and no new low, while the Nasdaq recorded 54 new highs and no new lows.
(Reporting by Medha Singh in Bengaluru; Editing by Maju Samuel)
NOTE: This article was lightly edited by Yahoo Finance to include expert quotes.
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