Investing.com -- Market exuberance is on the rise but valuations haven’t yet reached extreme levels, Evercore ISI strategists said in a Sunday note.
While the S&P 500's trailing price-to-earnings (P/E) ratio of 25x is considered lofty, strategists argue it does not signal irrational exuberance or imminent market top conditions.
“Valuations are not extreme “enough” with the Fed cutting and the Economy strong, sentiment is not universally optimistic, and aggregate market cap of speculation hotspots is not large enough to mark a significant top,” Evercore’s team led by Julian Emanuel wrote.
These hotspots, most notably crypto and Tesla (NASDAQ:TSLA) stock, have a market cap of less than $5 trillion and as such “are not meaningful enough in proportion to cause a broad dislocation on a pullback,” strategists added.
The “Trump Trade,” characterized by a post-election surge, has pushed major US indexes to new all-time highs. However, Evercore anticipates a potential correction before the January 20 inauguration. Such a pullback could resemble the volatility seen during the meme-stock craze of early 2021 or the "Volmageddon" of 2018, both of which were followed by sustained rallies.
Evercore maintains its bullish trajectory, projecting the S&P 500 to reach 6,600 by mid-2025.
With the VIX volatility index near yearly lows, investors need to “think tactically” and buy stocks when the VIX is high, strategists noted.
“Our base case remains that a mild setback is ahead as Exuberance Rising has limits while market volatility has floors,” they added.
The investment firm points out that one of the potential “silver linings” of a developing Trump Trade correction is the easing of bond yields and a weaker US dollar.
This could provide President Trump with greater flexibility to implement policy measures. Moreover, Evercore suggests that bond yields remaining below the 4.5–5% "stress zone" would offer general support to stocks, even amid the anticipated fluctuations in 2025.