‘Bubble may be far from bursting’: Capital Economics says S&P 500 could hit 6,500 by end of next year
The S & P 500 closed above 5,000 for the first time last week. But as the index rose, so did concerns about its valuation. The S & P 500’s forward price-to-earnings (P/E) ratio now stands just over 20, a level last seen in February 2022 and far above the historic average of about 16, according to FactSet data. A high P/E ratio indicates that investors are paying more to buy shares now than in the past, without an increase in profits. However, investors need not fear as the rally could still have plenty of room to run, according to Capital Economics. The London-based research firm forecasted that the S & P 500 could close this year at 5,500 — slightly above consensus — before charging ahead to hit 6,500 by the end of 2025, citing the valuation trajectory during the dot-com bubble in the late 1990s. .SPX 1Y line “The bubble in the S & P 500 that is forming now resembles the bubble that formed in the second half of the 1990s in many aspects, not least the way in which it is an attempt to capture the future benefits of a transformative technology,” said John Higgins, chief markets economist at Capital Economics in a note to clients on Feb. 12 titled “This bubble may be far from bursting.” Higgins suggested that artificial intelligence is the transformative technology gripping markets today, just as the explosion of the internet was in the late 1990s. However, Higgins continued: “valuation remains far short of what it reached then, suggesting that it has plenty more room to inflate.” Higgins pointed out that the S & P 500’s current forward P/E ratio of just over 20 falls well short of the highs of 25 seen during the tech bubble. Capital Economics also noted the index’s current rally is highly concentrated in mega-cap tech stocks like Apple and Microsoft . However, the research firm said the combined valuation of these companies’ sectors — information technology, communication, and consumer discretionary — is still lower than during the dot-com bubble. Further, if the so-called “Magnificent 7” stocks were stripped out, “the rest of the market is also lower, which points to the possibility of the rally broadening out,” Higgins added. While acknowledging that it’s impossible to predict bubbles, Capital Economics suggested that sustained modest earnings growth could see the rally continue through 2025.
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