Stock-market valuation are “historically extreme” by almost every measure, notes Deutsche Bank's Binky Chadha. While valuation corrections don't necessarily...
Stock-market valuations are “historically extreme” by almost every measure. And while valuation corrections don’t necessarily result in market pullbacks, the risk of a “hard” correction is growing, warned a top Wall Street strategist.
Need to Know: This Wall Street firm is sticking to its S&P 500 price target. Here’s why it says a correction is overdue. Those types of soft valuation corrections are typically seen early in a recovery when earnings growth is rapid, he said. During this recovery, however, the “compression” in earnings multiples has been slow and uneven, Chadha observed.
Chadha said a “surprisingly rapid rebound” in earnings is the most likely explanation for the extreme valuations, noting that S&P 500 earnings have topped the bottom-up analyst consensus estimate by an unprecedented 15 to 20 percentage points for five consecutive quarters. But that dynamic appears set to end, he said, noting the analyst consensus appears to have caught up, while the pace of earnings beats and upgrades, a key driver of equity upside, is set to slow.
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