Thursday, 24th May 2018
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John Smiles

Qualified Financial Advisor

Are US stocks now overvalued?

The answer to this question is not a straight yes or no. Looking at a number of valuation metrics, it is possible to say, yes. The S&P 500 has climbed from a low of 683 on 6th March 2009 to 2,439 on 22nd June 2017. This far surpasses the pre-recession high of 1,562. In 2017, the index has risen 8%, pushed higher in particular by tech stocks. Some asset managers are now advising their clients to take their gains and reallocate capital to more attractively valued regions, such as Europe or emerging markets. Others say that to do so will result in investors missing out on further gains.

The reason for their optimism is they think the market has not factored in the Trump promised tax and infrastructure plans which have yet to be implemented. Cynics think Trumps plans will never come to fruition.

The optimism comes from the fact that the Speaker of the House of Representatives, Paul Ryan, passionately believes the USA has a totally uncompetitive corporate tax system that must be reformed and rates need to be brought down massively. The Republicans have a majority in Congress and Paul Ryan has recently said that he expects to have the full tax package proposed in the autumn and implemented by the end of the year. While healthcare might be troublesome, everybody loves tax cuts.

If the corporate tax cut is implemented, with a cut from 35% to as low as 15%, it will drive back to the US, money currently sitting offshore accumulated by US multinational companies. This in turn will benefit local projects.

When such companies bring their cash back to the US under the tax cut, they may invest in manufacturing, but a lot of them are likely to end up spending the cash on share buybacks or distributing it to investors via dividends.

The huge volume of cash being repatriated is highly likely to end up in people’s pockets which will be positive for the economy and for consumers. The result is likely to be higher spending and investment all of which is positive for company valuations.

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