iStock; Rebecca Zisser/BI
The stock market is "entering Crazy Town" as valuations creep toward generational highs, Stifel's chief equity strategist Barry Bannister said on Thursday.
His comments come a day after the stock market soared to record highs following Donald Trump's election win, with the Dow Jones surging more than 1,500 points and the Nasdaq gaining nearly 3%.
Bannister said current market valuations are pricing in an incredibly optimistic scenario that could lead to disappointment for investors.
"Even allowing for the best-case scenario of a U.S. soft landing, and despite a potential ramp higher for U.S. fiscal spending, as well as China global cyclical stimulus and lastly a geopolitical 'reckoning', the S&P 500 is a mania, nearing a 3-generation valuation high," Bannister said.
Bannister added that while he expects the S&P 500 to reach "the low-6,000s" in the short term, such a move higher would result in valuations hitting 80-year highs, as measured by the cyclically adjusted S&P 500 CAPE earnings yield.
"The Earnings Yield (EPS/Price) is near the 3% low for the entire post-WW2 (since 1945) 3-generation period," Bannister said.
According to Bannister, the extreme overvaluation suggests that even if the S&P 500 continues to rise a few percentage points to the low 6,000s in the short term, it is ripe for a 1,000-point decline, or about 13%, within a year or so.
"If S&P 500 tracks a century of manias it pops to low-6,000s in 4Q24 then round-trips to ~5,250 fair value" by early 2026, Bannister said.
The S&P 500 traded at 5,965 Thursday afternoon.
Ultimately, Bannister believes that current stock market sentiment is nearing the point that typically marks the end of a bull expansion. Quoting the famed British investor Sir John Templeton, he added:
"Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria."
