Beyond Meme Stocks, Excess Has Ebbed Since Powell Said ‘Frothy’

When the Federal Reserve last met at the end of April, Chairman Jerome Powell acknowledged that markets “are a bit frothy.” Now, some of that excess appears to exiting -- particularly if you discount the daily gyrations in meme stocks.

Yes, share prices keep setting new records, but they’re also looking less expensive on the way up as companies largely crush profit forecasts. The price-to-earnings ratio for the megacap FAANG tech shares like Facebook and Apple, which make up roughly a quarter of the S&P 500, sits just below 47, which is almost its exact average over the past five years and down from nearly 59 in mid-February. Indexes are the same: The S&P 500 price-to-earnings ratio is currently 30 after hitting an all-time high of 32 in late March.

In the eyes of JPMorgan’s Elyse Ausenbaugh, that cooling off means Fed officials likely feel little pressure to consider asset prices in their policy decisions as the last two-day meeting comes to a close this afternoon.

“Look at the five biggest stocks in the (S&P 500) and they’re actually trading at valuations that, relative to their history, aren’t all that unpalatable,” Ausenbaugh, a global markets strategist at the firm’s private bank, said on Bloomberg Television. “So I don’t necessarily think that the Fed is really having this perspective that they’ve got to manage or consider carefully as they determine what their future policy path is going to be.”

Beyond Meme Stocks, Excess Has Ebbed Since Powell Said ‘Frothy’

Meanwhile, Bitcoin has retreated nearly 40% from its April peak. Dogecoin -- the joke cryptocurrency that inspired Powell’s answer last time -- has seen its value halved since that meeting. An index of special-purpose acquisition companies, or SPACs, once the hottest destination for speculative cash, has largely traded sideways for the past several months.

Of course, there’s still plenty of speculative fervor surrounding the most popular stocks for retail traders. Theater chain AMC Entertainment Holdings Inc. -- which is losing money and therefore doesn’t even have a price-to-earnings -- is up nearly 2,700% this year. GameStop Corp., another profitless business, has rallied more than 1,000% in 2021.

However, those companies are merely “a fly on the elephant in terms of market impact” and are unlikely to sway the Fed’s thinking in any direction, according to Schroders investment strategist Bill Callahan.

“Definitely some froth came out of the tech sector, we saw froth in crypto markets that is starting to come out,” Callahan said in an interview. “In the Fed’s mind, yes, those are pockets of froth. But that’s not going to shape their policy and economic outlook.”

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