Stock markets reach higher highs
US stock markets are recording higher highs. The S&P 500 (SPY) closed June 20 at an all-time high of 2,954, while the Dow Jones Industrial Average (DIA) hit a record high on June 21 before slipping at the close. SPY and DIA have gained 17.6% and 14.5%, respectively, year-to-date. Despite stock markets reaching highs, gold prices are gaining traction. In the last month alone, the SPDR Gold Shares ETF (GLD) has gained 9.7%, while SPY and DIA have gained 2.6% and 3.2%, respectively. Safe-haven assets’ outperformance of risk assets as stock markets peak implies bullishness for gold.
Stock investors wary
While markets are reaching highs due to the Fed signaling rate cuts, investors are growing wary of stocks’ valuation and growth potential. Approximately 50% of fund managers surveyed by Bank of America Merrill Lynch expect global growth to weaken over the next 12 months. They are also bearish about corporate profits, with 41% expecting them to deteriorate over the next 12 months.
Stretched valuation and gold alternatives
Billionaire investor and Omega Advisors chairman and CEO Leon Cooperman told CNBC on June 20 that a big move in stocks could mark a “close-out move.” He thinks that, at the level of 3,100, the S&P 500 would be “knocking on the door of euphoria.”
At 20 times its earnings, SPY’s valuation looks stretched considering its long-term average multiple of 15.75x. Cheaper interest rates (TLT) have a lot to do with stock markets’ higher valuation. For markets to sustain their current multiples, there will need to be significant progress in corporate earnings. Currently, there’s an uphill battle with inflation running low, unemployment at an all-time low, and global conditions staying rough. JPMorgan Chase (JPM) has voiced similar concerns. To learn more, read Trade Resolution, Easy Fed, and Growth Can’t Hold for Long.