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Potential for gains in US stocks on valuation.

Summary: New Yor: Major United States stock indices have never been higher -- and yet that's ...

New Yor: Major United States stock indices have never been higher -- and yet that's hardly scaring people. Stocks have soared in 2013, with the Dow climbing almost 11 per cent to hit a series of new all-time highs while the S&P 500 has jumped 9.4 per cent, falling just short of its all-time closing high after rising for 10 of the past 11 weeks. And yet, analysts see equities as fairly cheap. The rally has slowed, however. In the last eight trading sessions, the S&P 500 has managed a daily gain of more than 0.5 per cent just once. Questions remain about the potential impact of US budget negotiations or the Federal Reserve's plans in continuing its massive monetary stimulus. The Fed meets next week Taken on its own, analysts see potential for more gains in the US stock market, based on metrics like earnings prospects and valuation. The forward 12-month price-to-earnings ratio for the S&P 500 is currently 13.5, which is about 9 per cent less than the October 2007 ratio of 14.8 when the S&P last hit a record. "This shows that stocks are cheaper than they were at the time of the last high, and at the same time, alternative assets like bonds are much more expensive," said Paul Zemsky, head of asset allocation at ING Investment Management in New York, who helps oversee $170 billion. High quality stocks "We are at record levels, but you need to look at stocks in the right context, and in that context, they're not expensive at all." The S&P 500's earnings yield -- a reverse of the P/E ratio -- currently stands at 7.1 per cent, compared with 6.41 per cent for the BofA Merrill Lynch US High Yield Index. That's an anomaly in the markets -- the earnings yield has generally been lower than a benchmark junk-bond yield because it measures the risk of owning the highest-quality stocks versus the expected return on the lowest-quality bonds. The current P/E ratio is also below the historic average of 14.8, according to Thomson Reuters data dating back to 1968. The S&P 500 would need to rise to about 1,647 to become in line with the historic average -- about 5.6 per cent above current levels, according to Standard & Poor's. Interest rates remain near record lows while dividends are growing, another way that stocks are outshining bonds. In the most recent quarter, the average dividend yield for S&P 500 companies was 2.19 per cent, more than the 1.89 per cent yield in the fourth quarter of 2007, the period of the last market peak, says Standard & Poor's. In 2012, 403 S&P 500 components paid a dividend, the highest number since 1998. In contrast, the 10-year US Treasury note currently yields 2 percent, so the dividend yield on the S&P 500 would pay more than the bond, without even factoring in potential price growth. The S&P 500 is also trading well below its intrinsic value. The index is seen as having a price to intrinsic value ratio of 0.85.

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Publication:Times of Oman (Muscat, Oman)
Date:Mar 16, 2013
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