Major stock indexes have reached their record highs but it looks like investors are not concerned about it. Since the start of 2013, stocks have soared with the Dow advancing almost 11 percent to get new all-time highs. The Standard & Poor’s 500 index increased 9.4 percent and just short of its all-time high after it went up for 10 of the past 11 weeks. Equities remained cheap.
The rally of the stock market has slowed down. In the last eight trading sessions, the S&P 500 got more than 0.5 percent increase just once. There are concerns about the impact of the budget negotiations in Washington as well as the Federal Reserve’s plans in continuing with its stimulus program. The Fed’s policymakers are scheduled to meet next week.
Analysts see more gains in the near future in the stock market with regards to valuation and earnings prospects. S&P 500’s forward 12-month price-to-earnings ratio is now at 13.5, which is 9 percent below the ratio of 14.8 last October 2007. This was when the S&P 500 set its all-time high.
The S&P 500’s earnings yield is at 7.1 percent compared with 6.41 percent for the Bank of America Merrill Lynch US High Yield Index. The earnings yield is usually lower than the junk-bond yield because it measures the risk of having highest quality stocks against the expected return on the lowest quality bonds.
At present, the P/E ratio is below its average of 14.8, according to data from Thomson Reuters. The S&P 500 would need to advance to around 1,647 to reach the average, which is around 5.6 percent of the current levels.
Interest rates are still in record lows while dividends continue to increase. This must be another factor why stocks are outperforming bonds. In the most recent quarter, the average dividend yield for companies in the S&P 500 was 2.19 percent, which is above the 1.89 percent yield in the fourth quarter of 2007.