This strategist says S&P 500 is 18% overvalued By

-- The Metaq software mt4 official website is currently 18% overvalued, according to Ven Ram, cross-asset strategist at Bloomberg’s Markets Live.

In his analysis, which treats the index as a long-duration bond, the S&P 500's fair value stands at 5,120, based on the assumption that index dividends will grow at a compounded annual rate of 6.5% over the next decade, before slowing to 5% thereafter.

The S&P 500 closed at 6,049 on Tuesday, “meaning it is trading at an 18% premium over fair value,” Ram noted.

The strategist's valuation also extends to the , which, assuming a 10% dividend growth rate, has an indicative value of 17,664. With the Nasdaq closing at 21,567, it is trading roughly 22% above its suggested fair value.

These assessments hinge on the US economy maintaining stability and avoiding a recession. “Should there be a contraction, the correction could be far deeper,” Ram warned.

Despite the S&P 500's substantial returns of more than a compounded annual 25% since the end of 2022, there is a disconnect with the 7% rise in aggregate earnings per share (EPS), raising concerns about the sustainability of the market's growth.

Nonetheless, the analysts remain bullish, Ram says, forecasting an upside target of 6,510 for the S&P 500 by year's end, with expectations of nearly a 12% increase in EPS to $267.

“Much of that bullishness stems from conviction that the Magnificent Seven stocks, which have seen earnings grow at an astounding compounded annual rate of 38% over the past two years, will perform an encore,” he explains. This group of stocks accounts for a third of the S&P's market cap, up from 19% at the end of 2022.

The overall market optimism is also bolstered by the growth outlook for the US economy, which the Federal Reserve anticipates will accelerate to 2.1% in 2025. This rate of growth is considered robust compared to other major economies, with the exception of China and India.

“While the S&P is far from cheap, valuations have been far sillier — and for longer — before,” according to Ram.

He highlights the example of the dot-com boom, when companies with small revenue and earnings traded at elevated valuations. “That didn’t end well, with the S&P tumbling about 40% in the three years through 2002,” Ram continued.

The strategist says that predicting the timing of any correction is highly uncertain, with potential factors such as slowing earnings growth among the Magnificent Seven and the impact of Treasury yields reaching 5% posing risks to the market's stability.

“While the isn’t too far from 5%, where it may prove to be a drag on stocks, the question is how persistently yields will stay around or above that level,” he concluded.

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