U.S. Stock Market May Be Expensive, but It’s Not Time To Panic Yet: Piper Sandler CIO

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As a seasoned researcher with over two decades of experience under my belt, I find Michael Kantrowitz’s insights on the U.S. stock market to be both insightful and practical. His nuanced approach to valuation, focusing on the underlying drivers of market multiples rather than blindly following valuation models, resonates with me.

On October 14, Michael Kantrowitz, as the head of investments at Piper Sandler, appeared on CNBC to express his views about the U.S. stock market.

He provided a nuanced view of the current market, acknowledging that although stock prices are expensive, this should not be a reason to become overly bearish. He emphasizes that while most valuation models indicate that the market has been expensive for some time, Kantrowitz notes that the focus should be on understanding the underlying drivers of these multiples, particularly the removal of risks that were more prominent two years ago. According to him, inflation, higher interest rates, and Fed tightening have been largely priced out of equities, explaining why the market is positioned where it is today.

As a researcher, I concur with Kantrowitz’s viewpoint that an overvalued market alone doesn’t necessarily warrant a bearish outlook. Instead, it is essential to watch for the emergence of new risks such as a reemergence of inflation, a rise in interest rates, or renewed concerns about a recession. However, I share his optimism that at present, there seems no immediate indication of these risks materializing. Consequently, while the market may continue to appear expensive in the short term, it might be prudent to maintain our current stance rather than taking a bearish position.

Kantrowitz urges investors to pay close attention to specific stocks that are consistently demonstrating growth in their earnings. He explains that these stocks, although they may appear costly, have the potential to surpass expectations because they can maintain higher valuations for an extended period. Additionally, he suggests not to solely rely on tech stocks or other sectors historically known for being expensive. Instead, it’s essential to explore each sector and find stocks that exhibit substantial revisions in their earnings forecasts.

As an analyst, I’ve observed that while higher bond yields can potentially pose challenges for the equity market, this impact is significant only when these yields surpass a certain level. To illustrate, at the beginning of the year, interest rates increased without causing immediate distress in equities until they hit approximately 4.30%. At this point, rate-sensitive and economically sensitive stocks, such as utilities, real estate, and regional banks, began to underperform. Therefore, I predict that for a notable impact on the broader market, bond yields would need to breach the 4.25% threshold.

Kantrowitz maintains a cautious stance on earnings updates, pointing out that estimates usually decrease throughout the year, with a significant drop often occurring in the last quarter. He suggests this trend might persist, especially for small and mid-sized companies. Yet, he emphasizes that large-cap stocks have shown more resilience in terms of earnings, which is why they’ve been consistently outperforming.

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2024-10-14 21:17