Why The Stock Rally Should Continue Through The Summer

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Posted: Jun 05, 2020 9:04 AM
Why The Stock Rally Should Continue Through The Summer

Source: AP Photo/Richard Drew

The market is hardly overvalued and barring any unexpected bad non-economic news, is likely headed higher. 

The current price-earnings ratio for the S&P500 is about 22.

That is in line with the 12-month forward P/E ratio based on analysts' expected earnings.

The 25-year moving average is 25 and with the secular decline in interest rates, the sustainable P/E ratio is likely to continue to move up above 25.  

Simply the inverse of the P/E ratio shows us how stocks compete with long-term bonds and at about 4.5 percent, it is about triple the yield on long-term bonds.

That is more than adequate compensation for risk.

Current stock prices should be sustained by the expected pace of economic recovery and should go higher through the summer.

The market is reflecting optimism that some solution can be reached regarding the Coronavirus-vaccine, treatment or a combination of effective testing and social distancing-to fully open the economy, less perhaps huge gatherings at stadiums and theaters. Put another way no uncontrolled second wave that forces another lockdown.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.