US Stock Market's Best September in 5 Years... Rising Concerns Over Overvaluation

S&P500 Recently Surpasses 5700 Level
"Short-term Market Volatility Expected"

The U.S. Federal Reserve (Fed) cut its benchmark interest rate by 0.5 percentage points, leading to a strong stock market rally, while concerns about stock market overvaluation are also growing.

Traders are working at the New York Stock Exchange (NYSE) in the United States. [Image source=Yonhap News]

According to MarketWatch on the 21st (local time), the S&P 500 index on the New York Stock Exchange has risen 1% so far this month, marking the best September since 2019. The S&P 500 recently surpassed the 5700 level for the first time.

The U.S. stock market has historically performed poorly in September. According to Dow Jones data, the average return of the S&P 500 index in September since 1928 has been only -1.2%. In September 2022, it fell more than 9%, and it also dropped about 5% last September.

However, as stock prices rise, concerns about market overvaluation are expanding. Bloomberg reported that the U.S. rate cut has further increased already high valuations, making financial markets more vulnerable to bad news.

According to a model adjusting the S&P 500 returns for inflation and the 10-year Treasury yield, current asset prices are higher than at the start of the previous 14 rate cut cycles.

The outlet interpreted this year's S&P 500 rise of over 20% as a sign that many positive factors have already been priced in. According to LSEG, the price-to-earnings ratio (PER) of S&P 500 companies is 21.4 times, far exceeding the long-term average of 15.7 times.

The 'Buffett Indicator' is also approaching an all-time high. This indicator divides the total U.S. stock market capitalization by the estimated GDP of the previous quarter and is used to gauge whether the stock market is overvalued.

Experts have analyzed that short-term stock market volatility will be high. According to Ned Davis Research, the stock market performance in the second half of September since 1950 is known to be the worst over a two-week period.

The volatility index (VIX), known as the 'fear index,' has risen to an average of 25 in early October during the last eight presidential election years, exceeding the long-term average of 19.2. Recently, this index stands at 16.4.

However, experts reportedly do not worry about a long-term stock price decline. According to FactSet data, Wall Street analysts expect corporate earnings growth rates to be in double digits next year. Investment bank BMO Capital Markets recently raised its year-end target for the S&P 500 to 6100.

The financial market is expected to focus on employment data. Fed Chair Jerome Powell stated when announcing this rate cut that he aims to proactively respond to a weakening labor market. The September monthly employment report will be released on October 4.

Corporate earnings announcements will also begin next month. According to LSEG IBES, S&P 500 corporate earnings are expected to increase by 5.4% in the third quarter compared to the same period last year and to rise nearly 13% in the fourth quarter.