The U.S. stock market has entered "cloud cuckoo land," a place where it was last believed seen in 1929, according to
StreetAuthority columnist Adam Fischbaum.
Fischbaum noted that while considerable Wall Street pundits have declared the stock market is not overvalued, he has grave doubts on that score. He relies on stocks’ forward P/E as an important valuation metric, and from that viewpoint, share prices look lofty.
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“The current forward P/E for the S&P 500 index is around 16, which means the S&P's earnings for 2015 are projected to come in at around $118. Current earnings are around $101, which equates to a current P/E of 19.3. This implies that earnings are expected to grow nearly 17 percent,” Fischbaum wrote.
But is it realistic to think U.S. corporate earnings are going to expand at that level from here? Given the Q1 decline in GDP, some observers might think not.
“The U.S. economy is growing at an annual pace of barely 2 percent. I'm an optimist, but I just don't see that kind of earnings growth happening amid such anemic economic growth,” Fischbaum wrote. “It's not that a P/E of 16 is crazy. It's that earnings growth of 17 percent a year feels too ambitious. And when the market is too ambitious, it sets itself up for disappointment. And when it comes to investing in stocks, disappointment usually ends up in a loss of money.”
In his StreetAuthority column, Fischbaum took a conservative approach of recommending three stocks that he sees as not overvalued, and that are trading at a discount to the overall market's forward P/E.
“This strategy provides upside in the event of positive earnings surprises and downside protection against price volatility in the event of a broader market correction,” he said.
Those three stocks are Oracle, BP and AFLAC.
As for the broader stock market, Fischbaum noted that in the ancient Greek play “The Birds,” the phrase “cloud cuckoo land” referred to an idealistic state where everything was perfect.
“The term was used to describe the state of [the] stock market before the crash of 1929 by U.S. Agriculture Secretary Henry Wallace, who would later serve as vice president under Franklin D. Roosevelt,” he said. “When I look at the current market conditions, I think we should be dusting off that term again.”
CNN Money’s current “Fear & Greed Index,” which purports to measure investor sentiment using such factors as put and call ratios and market volatility, is currently at a reading of 73, just below the “extreme greed” level that commences at 75-100.
On Twitter, technical analyst
Ralph Acampora of Altaira Wealth Management, was fairly optimistic.
“Despite negative GDP yesterday [Wednesday], the market absorbed this news and proceeded higher. When bad news can't take you down, that's good news,” he tweeted.
“Given the over-stretched nature of this market, any sell-off/pause is welcomed. It resets the imbalances between supply & demand,” Acampora said.
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