According to historical correlations, high interest rates may put pressure on asset valuations after this year’s significant gains for the U.S. stock market.
Even though the S&P 500 is up 16% so far this year, many investors are concerned that the index has become unaffordable, particularly given the rise in Treasury yields.
The present real rate suggests a projected price-to-earnings (P/E) ratio of roughly 15 to 16 times, based on records since 1982, as opposed to its current ratio of about 20 times, according to JPMorgan equity strategists.
While real rates and the cost of capital are going further into restrictive territory, stocks are up 16% YTD, largely due to multiple expansion, according to a note from JPMorgan equity strategists. “History suggests that this relationship is deteriorating and endangering the equity,”
multiple.”
JPMorgan determined that stocks are 14% overvalued based on another metric that compares P/E ratios to long-term projected profits growth.
The strategists claimed that the “unsustainable” level of global debt along with “a credible rise in inflation risk” had caused a significant increase in long-term rates.
A significant percentage of the move may be linked to supply/non-growth forces, which is another drawback for an already stretched stock multiple, according to the analysts.