Wall Street's Night of Terror: Overvaluation and Debt Become Halloween "Ghost Stories" for U.S. Stocks

The Zhitong Finance APP noted that the U.S. economy may have escaped the long-standing concerns of recession, pushing the stock market to record levels. However, this Halloween, investors are still cautiously searching for vague market signals that may indicate future troubles.

High valuations that could lead to meager stock returns in the future, the lagging effects of the Federal Reserve's interest rate hikes, and the ever-increasing debt burden are all causing financial professionals to be on edge.

Emily Roland, co-chief investment strategist at John Hancock Investment Management, stated:

Although estimates for earnings over the next 12 months have remained flat at around $267 for the past month, the S&P 500 has risen by 5%. This has led to market valuations reaching a two-year high, close to the levels seen in 2021.

The current forward price-to-earnings ratio of the S&P 500 is 21.8 times, compared to a trailing P/E ratio of 26.58 times. Valuations are at the third highest level in modern history for the S&P 500, only behind 1999/2000 and 2021. If this upward trend in valuations continues, then forward returns will become less attractive.

Dave Mazza, CEO of Rounhill Investments, stated: An overlooked risk is the unbalanced economic recovery, which is increasingly becoming a situation of "two economies." The wealthiest Americans continue to experience job growth, rising incomes, and expanding net worth, while those at lower income levels struggle to gain benefits. This wealth gap not only creates potential social and economic issues but also poses long-term risks to consumer spending and economic stability, as broader participation in economic gains is often a key factor for sustainable growth.

Bob Elliott, co-founder and CEO of Unlimited, stated: Despite the short-term momentum for the U.S. to continue strengthening due to the Federal Reserve's "overly accommodative" policy relative to strong potential growth, current pricing suggests that future profits and wealth may forever be incredibly concentrated among U.S. companies. The last time the U.S. stock market saw such a concentration of market capitalization was before the tech bubble burst, and we all know what happened in the following years.

Brandywine Global Investment Management portfolio manager Jack McIntyre stated: The interest payments made by the U.S. government exceed defense spending. Both of these major expenditures are unlikely to decline in the short term. It simply highlights that our spending far exceeds our capabilities, living on debt, and at some point, the bond obligation officer will take revenge. Perhaps as soon as next week.

David Miller, co-founder and Chief Information Officer of Catalyst Funds, stated: This is the projected return of the S&P 500 index over the next 10 years based on the current cyclically adjusted price-to-earnings ratio. Our current market value is at 36 times earnings. Looking back at historical data since 1900, the S&P 500 index has a projected return of negative 84% over the next 10 years with a CAPE of 36 times. Valuations remain elevated.

Alesio De Longis, Head of Invesco Solutions, stated: While the market has celebrated the end of the tightening cycle and digested multiple rate cuts for 2024 and beyond, we should not overlook the fact that the last tightening cycle was one of the most aggressive in history in terms of scale and speed, and its lagging effects are still impacting the economy and financial system. Although each cycle is different, historical evidence from multiple cycles reminds us that markets and the economy may take up to two years to fully digest the effects of monetary policy. Therefore, it is not surprising that economic growth may slow in the coming quarters. This situation does not necessarily indicate a recession, but it does suggest that economic growth faces downside risks and that there is an increased risk of stock market volatility.

Mean reversion in asset prices may lead to a convergence in performance between high-risk and safer asset classes, where fixed income may perform well, while defensive stocks, quality stocks, and low-volatility stocks will outperform the market.

Wes Kriel, Senior Investment Director at Dimensional Fund Advisors, stated: It's a scary thought: your Halloween candy stash may outlast many existing ETFs In fact, 140 ETFs have closed in the first three quarters of 2024. This continues a long-standing trend in the ETF industry, where many are quickly shut down almost as soon as they are launched. The growth in the ETF space provides investors with an increasing array of choices for their portfolios. However, these outflow figures remind investors that they need to assess what lies behind these strategies and choose asset classes that align with their long-term goals. This may help avoid chasing the hottest investment sectors of the month, which is particularly important.