Is the US equity market overvalued?

Ally Selby: Hello and welcome to Livewire Market's The Pitch. I'm Ally Selby. I've got a few quick stats for you. The S&P 500 has lifted 27% over the past 12 months. The Nasdaq has soared 39%. So, is the US overvalued? To find out, we're joined by Wilson Advisory's, Head of Investment Strategy, David Cassidy. Thank you so much for joining us, David.
David Cassidy: Good question. The first thing I'd say, Ally, is I'm a little bit sceptical of the CAPE Ratio, I think some people know that as the Schiller PE, which is a series that has a very long history. So I think this goes back to 1870, but sometimes, you can have too much data and I really think comparing the US PE at the moment to what it was in 1870 or even 1970 is a little bit dangerous. So while I think the US market is probably a little bit overvalued, I don't think it's as overvalued as, perhaps, the CAPE or Schiller PE is suggesting, because the US market is just so different to what it was back 50, or 100 years ago or even 20 years ago.
David Cassidy: Well, even on a more straightforward PE, either the last 12 months of earnings or the next 12 months, which is a little bit simpler than a CAPE Ratio, which looks at the last 10 years, you still get the same message, some over-valuation there.
David Cassidy: Well, that's the debate. You're looking at 21 times on a one-year forward PE against a short-term average of 19 times over the last five years. So, that's giving the US market the benefit of the doubt in terms of its really about tech now and that's been the case for at least five years. So even on that basis, it looks maybe 10% overvalued. You could make an argument that there's so much growth coming, courtesy of the tech sector around AI, that you should pay that multiple (21 times). So it's not impossible that the US market is not overvalued, but my inclination is to pay a little bit of attention to the long-run averages on it. Basically, the market's probably a little bit overcooked on the upside at the moment.
David Cassidy: I think there are some similarities and some differences. Clearly, tech has been leading the market. I think the market's not superficially as overvalued on the straight PE. The PE got to 25 times in 2000 at the top, it's at 21 now, so simplistically, we're not quite there. The PEs of the tech sector itself are not as high. I think there was a lot of hope and expectation in 2000. There wasn't a lot of earnings around at the time. So you had, in some cases, infinite PEs. This time around, there are a lot of earnings backing these stocks, like NVIDIA (NASDAQ: NVDA), Microsoft (NASDAQ: MSFT) and the like. So yes, there's a fair bit of exuberance around tech, and there's a lot of expectation, but I don't think there's as much froth and bubble now as there was back in 2000, from my perspective. So I am a little bit cautious, but nowhere near as cautious as I was back in 2000.
David Cassidy: It's possible it could be both. I think we're probably overdue for some sort of correction. I've thought that for a while. Possibly, the bond market could be the catalyst for some sort of pullback. But I'm more in the camp that if we see a correction, it's more in the 5% to 10% area, not the 20% or indeed 50% we saw back in 2000/2001. So I am more in the camp of correction within an uptrend, rather than lapsing into a bear market.
David Cassidy: I think a little bit of both, Ally. I think in the case of NVIDIA, it's been very, very strong over the last 12 months with good reason, in terms of the earnings delivery that it's achieved. But I think we'd put that in the hold category at the moment, not necessarily a sell. In the case of Microsoft and particularly Alphabet (NASDAQ: GOOGL), we still think there's an ability to accumulate or buy those stocks. We still think the valuations there are quite reasonable when you look at the long-term growth. So we're happily accumulating exposures in those. But I think investors should be looking beyond just the tech space, in terms of their investment portfolio, to other less strongly performed areas of the market, so we're doing a little bit of both at the moment.

Ally Selby: Well thank you so much for your time today, David. It was a pleasure to have you on The Pitch.

David Cassidy: Thank you.

Ally Selby: If you enjoyed that too, don't forget to subscribe to Livewire's YouTube channel, we're adding so much great content just like this, every single week.

Learn more

Wilsons Advisory think differently and delves deeper to uncover a broad range of interesting investment opportunities for their clients. To read more of our latest research, visit our Research and Insights.