Investor sentiment, meantime, has been slow in turning more aggressive despite the power of the climb that has the S&P 500 up more than 11 percent in 2019 and already ahead of many strategists’ year-end targets.
Surveys of individual investors are right in the neutral zone. Outflows from stocks during the strong rally have been heavy and persistent — an anomaly that should count as a bullish contrarian signal. And professional investment advisors are back in the bullish camp but not in a particularly excessive way.
There is no clear edge in using the current sentiment setup for a trading call: The mood is decidedly less exuberant than in January 2018, when the S&P first traded near current levels, but professional investors are a bit more optimistic than they were last fall at the time of the thwarted fourth-quarter rallies.
Valuation is similarly situated. Here is FactSet’s chart of the forward 12-month price/earnings ratio:
The valuation peak 13 months ago above 18 times was when the market was rushing to price in the tax-cut windfall not yet reflected in analysts’ estimates. (Note that 2018 earnings came in so far above forecasts at the time that the forward P/E at the January 2018 peak was “really” only about 17.1-times the profits actually produced by S&P 500 companies in 2018.)
That makes the current P/E above 16 look a bit less cheap, relatively, given than forecasts are now slipping and currently imply less than 5 percent growth for all of 2019 — all of it coming in the second half.
The pattern in the above chart from 2016 is worth considering. There, too, stocks were likewise recovering from a nasty “baby bear market”amid an earnings downturn, after the Fed had squeezed in a December rate hike and then turned dovishly “patient.” The P/E nosed above 16 and held there as a resumption of earnings growth came into view.
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