S&P 500 index hits a milestone

America's S&P 500 has crossed the 2,000 mark against a backdrop of uncertainty.

America's S&P 500 index set a new record above the 2,000 mark this week. The index which tends to set the tone for the rest of the world's stock markets has tripled since the market rally began in March 2009. Solid US economic data and surprisingly good profit growth are behind the latest advance.

What the commentators said

Valuations have reached historic highs. The cyclically adjusted price/earnings ratio (Cape) is 26, around 40% higher than its historical average. Only in 2000 and 2007 was it higher.Profits look stretched too, said Martin Hutchinson on Breakingviews.

Profits were worth 10.8% of US GDP in the year to March, far above the 60-year average of 7.2%. Globalisation and outsourcing may have given profits a long-term boost, but "cheap debt also plays a part and won't last forever".

The tightening labour market will also hit profit margins as wages are pushed higher. Meanwhile, sales growth has been weak during the economic recovery.

706-S-P-500

In the last seven major tightening cycles, the S&P rose by an average of almost 5% in the six months before the first hike, noted Capital Economics. Then again, the debt load in developed economies is unprecedented and central bankers are not known for timing rate hikes well.

The rally may well continue for now, but as Oliver Pursche of Gary Goldberg Financial Services put it, investors shouldn't "look at this as the beginning of the next supercycle".

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Why Wall Street has got the US economy wrong again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
Central banks want politicians to take charge – but what will they do?
US Economy

Central banks want politicians to take charge – but what will they do?

The US Federal Reserve has come to the end of the road in terms of what it can do to accelerate any recovery, says John Stepek. It's over to the polit…
17 Sep 2020

Most Popular

Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
James Ferguson: How bad data is driving fear of a second wave of Covid-19
UK Economy

James Ferguson: How bad data is driving fear of a second wave of Covid-19

Merryn and John talk to MoneyWeek regular James Ferguson about the rise in infections in coronavirus and what the data is really telling us.
17 Sep 2020