Stocks are partying like it’s 1999 and it is breathtaking to say the least! The Dow Jones Industrial Average (see chart here) once again set a record high on Friday, closing just under the 45000 level. The S&P 500 (see chart here) also set an all-time high closing above 6000. The Nasdaq Composite (see chart here) is remaining strong above the 19000 mark and the small-cap Russell 2000 (see chart here and below) finally made a new all-time high last week after lagging most of the year.
What in the heck is going on with the major averages and these non-stop record highs? Well, one thing to point to is the end of the 2024 election. After the results came in, stocks, crypto and seemingly everything under the sun took off! Why you ask? Well the uncertainty of would get in in is over and clearly the markets liked the results! Are we looking at some form of irrational exuberance here? Or do the markets deserve this type of non-stop record highs?
One of the metrics I have consulted with is the price to earnings ratio aka the “p/e” ratio of the S&P 500 index. The price to earnings ratio is the ratio of a company’s share price to its earnings per share. This ratio is used for valuing companies to find out how they are priced. Now when I look at the overall p/e ratio of the S&P 500 (see chart here) it is trading just under a 30 price to earnings ratio. The historic price to earnings ratio of the S&P 500 is around 17. I think it is safe to say that stocks may be getting ahead of themselves comparatively speaking. Another metric I also consult with is the relative strength index aka the RSI. The Relative Strength index is a technical indicator that demonstrates whether a stock or index is overbought or oversold. Currently the RSI on the aforementioned indexes is approaching overbought territory according to the RSI principles.
Let’s not forget stocks and/or indexes can remain overbought for extended periods of time, however, earnings must indeed reflect or catch up to where the values are currently trading at.
Good luck to all 🙂
~George