NEW YORK (Reuters) - After big gains for the U.S. stock market this year, equity valuations could come under pressure from high interest rates, based on historical relationships, JPMorgan strategists said on Tuesday.
The S&P 500 is up 16% so far this year, but many investors are concerned the index has become too expensive, especially as Treasury yields have climbed.
According to JPMorgan equity strategists, the current real rate implies a forward price-to-earnings (P/E) ratio of around 15 times to 16 times, based on data since 1982, versus its current ratio of about 20 times.
"Equities are up 16% YTD mostly on multiple expansion while real rates and cost of capital are moving deeper into restrictive territory," JPMorgan equity strategists said in a note. "History suggests this relationship is becoming increasingly unsustainable, posing risk to the equity
multiple."
JPMorgan looked at another metric, which compares P/E ratios to long-term expected earnings growth, and found equities are overvalued by 14%.
The strategists said the "unsustainable" level of global debt combined with "a credible rise in inflation risk" had contributed to a sharp move higher in long-term rates.
"This is another negative for an already stretched equity multiple, especially since a meaningful portion of the move may be associated with non-growth/supply forces," the strategists said.