Wall Street Strategist Issues Troubling Assessment Of Stock-Market Rally As Prices Rise

Piper Sandler's chief strategist Michael Kantrowitz says that the market is getting ahead of itself. 

What Happened: In a recent presentation, Kantrowitz said that investors have priced out the risk of inflation. That, in turn, has led to a rise in price multiples, or valuations, that have fueled the rally of the S&P 500, Insider reported.

"Forward earnings estimates aren't keeping pace, signaling fundamentals will eventually catch up with investors. Plus, falling inflation means weaker pricing power and revenue growth," Kantrowitz said.  

According to the Wall Street strategist, multiples are moving up right now, "not because earnings expectations are really going up, which was the case in the 1990s and indeed was part of the case in late 2020, or early 2021."

"If you look at long-term earnings growth, we're sitting near record-low levels. So certainly multiples are going up, and we would argue, looking at this chart, that it's more about the idea that liquidity is accessible," he said.

Based on the price-to-earnings-to-growth ratio (PEG ratio), stocks are more overvalued than during the dot-com bubble and the 2008 crisis. This is due to a combination of low earnings growth expectations and a high price-to-earnings ratio. Unlike the more immediate price-to-earnings ratio, the PEG ratio considers longer-term future earnings, Insider reported. 

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In the presentation, Kantrowitz explained that, when the price multiple is exceptionally high and the earnings estimates for five-year growth are remarkably low, it results in an extraordinarily high PEG ratio. Reflecting on the chart, Kantrowitz emphasized the clear message it conveys.

"For all intents and purposes, the PEG ratio has never been higher in a normalized backdrop," he added.

According to Insider, Kantrowitz's official year-end price target for the S&P 500 is 3,225, indicating a 28% downside from current levels of around 4,500. 

"Given the strength in the first half, we consider the probability that we're less likely to reach the target we put out in January by year-end. That said, we still believe the second half of 2023 will see the lags of monetary policy continue to show up, particularly in earnings and labor, leading to negative returns in H2," he said in the presentation. 

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