- Piper Sandler advises against selling stocks despite the S&P 500's estimated 8% overvaluation.
- The company believes there are no immediate triggers for an economic recession, such as sharp rises in interest rates or inflation.
- Investors should focus on stocks with strong earnings momentum to outperform, the company said.
Piper Sandler's Monday memo says investors who are concerned that the stock market is overvalued should not sell stocks.
The Wall Street firm's portfolio strategy group, led by Michael Kantrowitz, the firm's chief investment strategist, estimated that the S&P 500 index is overvalued by about 8%.
“So what?” he said of the overestimation.
“8% overvaluation is no reason to be bearish. Stocks can maintain strong valuations as long as the usual suspects of interest rates, employment, and inflation don't trigger a 'fear' trigger,” Kantrowitz said. said.
He said that unless there is an imminent spike in interest rates, unemployment or inflation, the stock market should continue its upward trend, even if it is overvalued.
“For quite some time, almost every valuation model has pointed out that the market is overvalued. We always approach this from a catalyst perspective,” Kantrowitz told CNBC on Monday. .
Kantrowitz also encouraged investors to select stocks with strong earnings momentum when building their portfolios, as there are no immediate negative factors.
“It's OK for the stock market to remain expensive, but investors really want to focus on stocks that continue to have earnings momentum, because those are the ones most likely to outperform,” Kantrowitz said. This is because they can maintain their relatively high stock prices for a long period of time.”
He recommended that investors monitor credit spreads to determine whether there are fears in the stock market that could signal a period of negative stock returns in the future.
And so far they are showing no signs of stress.
“Credit spreads hit an all-time low on Friday, despite a close presidential election and a not-so-easy Fed meeting in the weeks ahead,” Kantrowitz said.
He said tighter credit spreads, a strong labor market and continued gross domestic product growth all indicate that investors should remain bullish, even if the stock market is slightly overvalued. He said it was a signal.