For investors concerned about the market's high valuation, Wells Fargo states there's no bubble forming. The S&P 500 is currently trading at about 25 times forward earnings after a 27% rally, which makes today's valuation appear expensive, as the 30-year average forward price-to-earnings ratio is 19 times, Wells Fargo said. However, the Wall Street firm argues that comparing today to the historical average might be unfair because the S&P 500 is more efficient than ever.
Wells pointed out that profit margins of S&P 500 companies have nearly doubled over the past 15 years, while net debt to earnings has halved in the same time. 'Stocks are not in a bubble, in our view, and investors should not let an above average P/E ratio prevent them from participating in the continuation of the bull market we see in 2025,' Austin Pickle, Wells Fargo's investment strategy analyst, said in a note. The Wall Street bank anticipates the S&P 500 will advance to 6,600 by the end of 2025, equivalent to about a 9% gain next year. This target aligns with the average forecast among top Wall Street strategists, which stands at 6,630 for 2025, according to CNBC Pro's Market Strategist Survey. Wells believes that deregulation under President-elect Donald Trump could contribute to earnings growth. The firm also suggests investors should look for market pullbacks to find entry points going forward. 'Periods of volatility should be anticipated as 5-10% pullbacks are common. In such an instance, we expect to find a buying opportunity,' Wells said
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