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July 20, 2021

Are Stocks Overvalued?

Cases of COVID-19 are declining and economies are re-opening. It won’t be long before the only thing that isn’t normal is interest rates. It’s widely expected that the first interest rate hike will be in late 2022 or early 2023, and it will probably take another two to three years for rates to rise back to pre-COVID-19 levels. Until then, economies will be in a growing phase with central banks holding your hands. Sounds pretty good, doesn’t it?

Time for a market correction? 

We have read concerns that stock markets, the U.S. in particular, are due for a correction. The main reasons being above normal valuations and recent strong performance. We respect the opinions, but we are more constructive.

Strong past performance has come from improving economies and asset inflation driven by money supply growth. Unlike other recessions, aggregate household savings and wealth have grown during this pandemic. Consumers are eager to spend, which will support corporate earnings growth. In fact, corporate earnings for the first quarter of this year have already surpassed the quarter prior to the COVID-19 outbreak.

S&P 500 Index earnings

Q4 2019


Q1 2021


Source: S&P Global

We are confident the global economy will continue to perform exceptionally well in 2021 and 2022. The recent market rally is simply a reflection of expected earnings growth.

When valuations are overvalued

The real question is – are markets ahead of the fundamentals? In other words, are they overvalued? Looking at price versus current earnings, the S&P 500 Index does look expensive – its price-to-earnings ratio is currently 24x compared to a historical average of 16-18x.

So, how do we bring market valuations that are above average… back to average? Will it be a sharp market correction as others have called for? Probably not. With a large pool of excess capital due to money printing and a lack of alternatives (as bonds offer little yield), investors will continue to favour equity.

In addition, due to a scarcity of assets that deliver growth (compared to the 10-year U.S. Treasury yield at 1.3%), fair value is probably at the top of its historical range. Therefore, we expect earnings growth (not a dramatic price drop) will gradually drive valuations down from 24x to 18x over the next three to five years. As we said at the beginning, central banks are holding investors’ hands by lending support whenever they need it.

What does this mean for your portfolios?

In our portfolios, we remain overweight equity and underweight bonds. We believe global economies are in the early innings of multi-year economic growth. The returns from equity through dividends and earnings growth will surpass bond yields even with some valuation compression. We’ve also allocated our assets globally, as valuations are much friendlier outside of the U.S. From time-to-time the markets will be bumpy, but it doesn’t mean they’re unsafe.

About the Author

Marchello Holditch

Marchello Holditch, CFA, CAIA

Vice-President and Portfolio Manager
CI Multi-Asset Management

Marchello Holditch, CFA, CAIA, Vice-President and Portfolio Manager, oversees CI's multi-manager, multi-asset investment programs. He is responsible for managing CI’s institutional and private client multi-asset portfolios and is a member of the CI Multi-Asset Investment Committee. Previously, Mr. Holditch led CI’s portfolio manager research and oversight function, where he was responsible for evaluating the investment managers of all CI funds. Prior to joining CI, Mr. Holditch worked at a major global consulting firm, where he assisted a wide variety of institutional clients with risk budgeting and asset liability modelling, as well as investment manager research and selection. He holds an Honours Bachelor of Mathematics degree in actuarial science from the University of Waterloo and is a CFA charterholder.

About the Author

Alfred Lam

Alfred Lam, CFA

SVP, Head of Multi-Asset
CI Multi-Asset Management

Alfred has more than 18 years of experience specializing in portfolio design, asset allocation, manager and fund selection, and risk management. While at CI Global Asset Management, Alfred has brought unique ideas and processes to the management of the team’s multi-asset strategies, including a mean-reversion currency management strategy, the concept of investing in concentrated and benchmark-agnostic portfolios, and a new approach to risk management. In addition to the Chartered Financial Analyst (CFA) designation, Alfred holds an MBA from the York University Schulich School of Business, and is a member of the CFA Institute and the Toronto CFA Society.


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Published July 16, 2021.