This year’s stock-market rally has pushed the S&P 500 index to valuation levels that make it difficult for the index to climb much higher based on the current macroeconomic environment, according to Citigroup Inc.
The S&P 500’s trailing price-to-earnings ratio is back to 18.2x, “dangerously close to the upper end of our fair value range,” Citi analysts said in a research report dated Jan 13. “We are comfortable with a 3700-4000 S&P 500 trading range call for now.” In Citi’s view, the S&P 500 is entering “a new, lower valuation regime” compared with the period seen since the global financial crisis of 2008.
“18-19x is pushing the fair value limits unless we get a more aggressive slowing in inflation, noticeably lower rates, coupled with other more sanguine macro readouts,” the analysts said. The Federal Reserve has been rapidly raising interest rates to combat high inflation, with many investors expecting the Fed to potentially pause its rate hikes this year as the elevated cost of living in the U.S. shows signs of easing.“We are left with conviction in our ongoing view that rate-driven valuation headwinds may persist, implying greater importance on earnings trajectories,” the Citi analysts said.
U.S. stocks were trading mixed Tuesday afternoon as investors digested fourth-quarter earnings results from Goldman Sachs Group Inc. GS and Morgan Stanley. Morgan Stanley MS , which beat earnings estimates, was the top performer in the S&P 500 on Tuesday afternoon with a gain of more than 7%, according to FactSet data, at last check.As for other major U.S. stock-market benchmarks, the technology-heavy Nasdaq Composite COMP was up 0.
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