In the list of shocking market events so far this year, it's hard to not to add the latest development in the stock market: not just a rebound rally, but the highest S&P 500 valuation of the past decade. Indeed, it's getting pretty tough to stomach. On one hand, stocks are the only asset class expressing a hopeful view of the future – one in which government policy will be enough to offset the worst of the real economic pain.
That very well may be the case, but with valuations even higher than prior to the crisis, the stock market is seemingly suggesting the result could be net positive. That's unlikely.
One simple explanation is that the extraordinarily accommodative actions by central banks have forced investors once again to go wherever they can to get the most yield with the most comfort, and right now, that list appears to be very short: big tech companies with secular growth momentum that survives quarantine. Those stocks are big and expensive, and a bigger part of the S&P 500 now than any time in 30 years.
Another way to justify valuations is to recognize that earnings are just being pushed out. Indeed, the forward two-year P/E is not as egregious. But can investor enthusiasm really last for that long? There's a possibility it may not have to, if corporate CEOs are playing it very safe and withdrawing guidance to set a low bar for this year. If life starts to look familiar soon, we may be in store for a slew of big beats the next quarter. If not, stocks are bound for altitude sickness.