It’s become a common refrain among those who believe the 2023 stock-market rally seems too good to last: by almost any measure one chooses, equity valuations in the U.S. are looking stretched.
Valuations are looking stretched Investors buying stocks today are paying more per unit of expected earnings than at any point since April of 2022, when interest rates were much lower than were they are now. The forward price-to-earnings ratio for the S&P 500 SPX, -0.25% currently stands at 19.7, according to FactSet data.
The equity risk premium has fallen to its lowest level since mid-2002, according to data analysis conducted by MarketWatch and Sierra Investment Management CIO James St. Aubin. Great expectations Right now, Wall Street analysts expect to see earnings growth rise next year following several consecutive quarters of declines in late 2022 and the first half of 2023.
A lot of things need to go right for companies to meet this lofty benchmark, St. Aubin said. For example, companies will need to show that they can continue to raise prices even as inflation levels off, while the U.S. economy will need to avoid the recession that many economists still expect will eventually arrive.
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