U.S. Stocks Still as Much as 14% Overvalued After Drop, NAB Says

(Bloomberg) -- Stocks in the U.S. may still be as much as 14 percent overvalued even after posting the worst year since the financial crisis, according to National Australia Bank.

American equities are getting closer to their fair value though remain at elevated levels, the firm’s analysis showed, using the cyclically adjusted price/earnings measure of equity valuations. The S&P 500 Index’s fair value is currently somewhere between 2,109 and 2,464, NAB market strategist Tapas Strickland wrote in a report on Monday. The gauge closed on Friday at 2,532.

U.S. Stocks Still as Much as 14% Overvalued After Drop, NAB Says

The analysis also cited the gap between the earnings yield on stocks relative to Treasury bonds indexed for inflation -- known as TIPs. On that basis, equities are 14.5 percent overvalued, according to the analysis.

Investors are grappling with heightened market volatility as concern grows that the Federal Reserve may not be able to keep lifting interest rates this year. U.S.-China trade tensions and their impact on global economic growth could weigh on the outlook for equities for some time.

Whether the pessimism that’s pulled stocks lower “continues for the rest of 2019 will largely depend on whether there is a near-term resolution to the trade war,” London-based Strickland wrote in the report. “Until clarity emerges, equity markets will have a rough start to the year with the Fed on hold and watching closely.”

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