Legendary stock market scholar Jeremy Siegel told Bank Of America clients on Thursday that U.S stocks “as a whole” were not overvalued and that some American stocks could even be priced too low.

According to the emeritus professor at the Wharton School at the University of Pennsylvania, U.S. stocks are selling at 22 times projected 2022 earnings. That’s not completely out of line given the current level of interest rates. But Siegel's view defies mainstream thinking that equities after richly priced after climbing more than 100% from its pandemic lows on March 24, 2020.

Moreover, Siegel noted that if one removes the mega-cap tech stocks, or FANG names plus Microsoft, from U.S. indexes, the S&P 500's price ratio to 2022’s expected earnings falls to 19. That’s a level more than a few investors might consider too cheap.

Corporate America can still “produce” cash-flow increases that will exceed the level of inflation, Siegel said.

He also said that the biggest challenge for U.S. equities in 2022 could be “taper tremors,” not taper tantrums, as the Federal Reserve begins raising interest rates. One unanticipated challenge might arise if the Fed has to raise interest rates more than three or four times next year.

However, Siegel indicated that he thought both the American economy and its corporations were strong enough to withstand four interest rate hikes of 25 basis points, or 1.00%. He joked that he was old enough to remember when the central bank might lift rates by 1.0% in a single move.

Nonetheless, he added that U.S. valuation metrics could be subject to change next year. In particular, he suggested that investors facing problems with portfolios overweighted in long-duration assets like tech stocks, which could be hurt by rising interest rates, might want to shift their preferences in favor of dividend-paying value stocks. Many shares of so-called value companies have underperformed growth stocks for one of the longest periods in history.

“Investors will want those income streams,” Siegel said. “Dividend-paying stocks are the only answer to income problems.”

And he stressed the importance of diversification. "Don't hitch yourself to one or two wagons," he said.

Siegel also observed that fiscal and monetary stimulus in the U.S. during the pandemic had been excessive, both in absolute terms and in comparison to other nations. This was a view shared by other speakers at the Bank Of America event.

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