Stocks might need a breather

Election jitters aside, it’s been a great year for stocks with the S&P 500 up over 22% in 2024. Huzzah.

Of course, the rally could run a while longer as we gallop into November, with the resolution — hopefully! — of the US presidential race.

At minimum, a clear outcome with a peaceful transfer of power could alleviate some investor uncertainty. The winner could even proffer a rationale for a further market rise, for instance, if investors equate, say, a Trump victory with an extension of the juicy corporate tax cuts he doled out when last in office.

On the other hand, the market has already moved significantly. Over the last six months, the S&P 500 is up some 15%, a frolic that’s pushed the alpha and omega of valuation metrics, the forward price-to-earnings ratio, into truly stretched territory.

As of the close of trading on Monday, the S&P was trading at a multiple of 22x next year’s projected earnings.

The market has rarely traded in such elevated territory, the only recent examples being the Covid-era stock-market boom, as traders snapped up stocks on the understanding that the stream of corporate earnings decimated by the pandemic would eventually bounce back. (They did.)

Before that, you’d have to go back to the euphoric days of the dot-com boom of the late 1990s and early aughts to find such enthusiasm for stocks.

Now it’s possible that with earnings season just getting underway, we’ll see Wall Street analysts adjust their profit forecast much higher over the coming weeks, which would make the market look less expensive than it currently does without requiring a pullback.

It also might be the case that the market is overdue for a few weeks of meandering, or, heaven forfend, a bit of a decline as some excess optimism is sloughed off by the grind through earnings season.

For the record, the last time we got this close to this kind of P/E multiple was around the start of Q2 earnings season back in July, which was accompanied by a bracing three-week market correction that saw the S&P 500 sink by about 10% on an intraday basis.

Nobody knows which way things might go.

But those who think the market enthusiasm might be a bit excessive may find it interesting to note Tuesday’s weakness in pockets of the market with the headiest stock sentiment — for instance, AI-levered semiconductors like Nvidia, Broadcom, and Applied Materials.

They’re all taking a bit of a header after the Dutch chip-equipment giant ASML seemed to spot something of an enduring soft patch for semiconductor demand outside of AI.