10/6/24

Weekly Market Recap

Last week didn’t see any significant moves in U.S. stock markets. The S&P 500 ended the week up 0.22%, while the Russell 2000, a small-cap index, declined slightly by 0.54%. The standout sector was energy, which surged almost 7%, largely due to rising oil prices amid turmoil in the Middle East.

In terms of global markets, Chinese stocks were the best performers, gaining about 13%, while European markets mostly saw low single-digit declines. In the bond market, short-term bonds outperformed intermediate and long-term bonds as most of the yield curve shifted upward. We don’t view this movement as problematic; in fact, it could create more opportunities for investors who are heavily allocated to cash and short-term bonds.

This week is important for economic data and corporate earnings. On Thursday, October 10, we will get inflation numbers for September, which will be closely watched as it’s the first CPI (Consumer Price Index) reading since the Fed’s recent 50 basis point cut. We are also entering earnings season, with major companies set to report next week. Banks such as JPMorgan and Wells Fargo will report on Friday, and their results can offer insights into the broader economy, as the banking sector plays a crucial role in economic activity. While the economy currently appears resilient, history shows that things can change quickly. Therefore, it’s important to remain balanced in our outlook, avoiding both excessive optimism and pessimism.

Chart of the Week

Is the stock market overvalued or undervalued? This question has been asked for as long as the stock market has existed. While we won’t answer that question today, we want to provide some basic insight into assessing market valuations. The chart above shows the Price-to-Earnings (P/E) ratio of the S&P 500—a straightforward valuation metric that divides the price of a company’s stock by its earnings per share. When this ratio is higher, it means investors are paying more for the same amount of profits.  It can be tempting to look at this chart and conclude that high valuations mean stocks are overvalued. However, the average P/E ratio has varied by decade, and valuations can remain elevated for extended periods before reverting to prior levels. While it’s true that valuations cannot rise indefinitely, the P/E ratio should not be used as a tool for timing the market. Still, understanding where valuations stand can help investors gauge potential long-term returns.

Source: FactSet, FRB, Refinitiv Datastream, RobertShiller, Standard & Poor’s, Thomson Reuters, J.P. Morgan Asset Management.

Price-to-earnings is price divided by consensus analyst estimates ofearnings per share for the next 12 months as provided by IBES since March 1994and by FactSet since January 2022. Average P/E and standard deviations arecalculated using 30 years of history. Shiller’s P/E uses trailing 10-years ofinflation-adjusted earnings as reported by companies. Dividend yield iscalculated as the next 12-months consensus dividend divided by most recentprice. Price-to-book ratio is the price divided by book value per share.Price-to-cash flow is price divided by NTM cash flow. EY minus Baa yield is theforward earnings yield (consensus analyst estimates of EPS over the next 12months divided by price) minus the Moody’s Baa seasoned corporate bond yield.Std. dev. over-/under-valued is calculated using the average and standarddeviation over 30 years for each measure. *Averages and standard deviations fordividend yield and P/CF are since November 1995 due to data availability.

Guide to the Markets – U.S.Data are as of October 3, 2024.