Are stocks starting to lose momentum? This week saw the S&P 500 reverse course – its first losing week since early September. Could there be more to come? My answer is yes – perhaps as much as 7-10%. However, it’s a question of timing. Irrespective, paying 22x forward earnings is a higher-risk bet.
Money Supply
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The Fiscal Tailwinds Helping Stocks
Will fewer rate cuts dampen the enthusiasm for stocks? It certainly hasn’t to this point. And could higher bond yields impact stock valuations? So far the market is not bothered. These (and other) questions need to be weighed carefully with the S&P 500 trading ~21.5x forward earnings. And whilst the multiple is heavily skewed by the ‘Mag 7’ – 21.5x is far from cheap. What’s more, from a historical perspective, paying a multiple above 20x offers investors a very low risk premium (e.g., with the risk free rate above 4.0%). But wait… what’s to say stocks cannot rise further? We’ll explore why they can…
Money Supply is Expanding: Fuel for Stocks
When the supply of money expands – it’s typically very good for stocks. For example, the S&P 500 index is said to appreciate at an average annualized pace of 14.02% when liquidity expands. However, when it contracts, that gain was only around 7.0%. Today money supply is once again expanding after one of the largest contractions in recent history. This has the potential to be very good for investors. As they say, it’s always easier swimming with the tide.