Returns from the U.S. equity bull market that started four years ago are matching those from the last half of the 1990s even as valuations are 28 percent lower.
The Standard & Poor’s 500 Index has gained 26.2 percent annually including dividends since March 2009, the same as during the last 50 months of the technology bubble, according to data compiled by Bloomberg. Shares in the index now trade at 18.6 times annual profit, below the average 25.7 multiple in the 1990s rally led by Internet companies.
For bulls, the valuations show stocks will keep rising after the S&P 500 advanced 164 percent as individuals scarred by the worst financial meltdown since the Great Depression return to equities. Bears say the price-earnings ratios mean investors lack confidence in the economy and corporate profit growth. They also note that the last time returns were this high, the bubble popped and more than $5 trillion was erased from the value of U.S. stocks, according to data from the World Bank.
“The size of this rally’s not what keeps me up at night,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees about $170 billion, said in a May 8 phone interview. “That was a tremendous rally then, too, but I’m not getting all nervous based on the size of the rally this time, because we’re not there yet in terms of valuation.”
2013 Rally
U.S. shares rose last week, with the S&P 500 increasing 1.2 percent to 1,633.70, pushing its rally for 2013 to 15 percent. Regeneron Pharmaceuticals Inc., which has the index’s biggest gain since March 2009, advanced 2.8 percent, while hotelier Wyndham Worldwide Corp. climbed 3.4 percent to bring its return to 1,986 percent. The index fell 0.2 percent to 1,630.82 at 9:39 a.m. New York time today.
Price gains in this bull market have failed to push valuations above historical averages because unlike in the 1990s, they were accompanied by earnings growth that was almost as great. Profits at American companies have surged 20 percent a year since 2009, twice as fast as during the dot-com advance. Companies in the S&P 500 earned $784.5 billion in the last 12 months, compared with $431.3 billion in 2000 and $255.7 billion in 1996, data compiled by S&P show.
“Valuation and sentiment are much more reasonable,” Greg Woodard, a portfolio strategist at Manning & Napier in Fairport, New York, said in a May 9 phone interview. His firm had $48.1 billion at the end of the first quarter. “The mentality then was this was a new paradigm, it’s not like it was before, you don’t pay attention to the traditional fundamentals. Today, I would describe the conditions as more positive for investing.”
Fed Stimulus
Concern the U.S. was at risk of another contraction prompted the Federal Reserve to take unprecedented action to spur growth during the last four years, pushing down interest rates and increasing the attraction of equities. The central bank pumped $2.3 trillion of stimulus into the economy and has held the benchmark lending rate near zero percent.