An Important Message for a Pricey Market

The market was all set to celebrate the holiday... But then Federal Reserve Chair Jerome Powell watered down the punch.

2024 was a bonanza for stocks. The S&P 500 Index soared an incredible 27% through mid-December.

Analysts expected a year-end rally to match... But they didn't get it.

Powell struck an unexpectedly hawkish note in the post-Fed meeting press conference on December 18. He noted that inflation remains stubborn... And he said the central bank should "be more cautious" about future interest-rate cuts.

Investors got spooked. The S&P 500 plunged 3% on the day. And stocks continued to struggle throughout last month.

Now, the bears are jumping in with their usual refrain...

They say the market is too expensive. They say the recent sell-off is the start of a long-overdue crash. After all, no market can stay this overvalued forever.

But here's the problem... Value is a terrible tool for timing the market in the short term.

We have a much better tool at our disposal. And today, it tells us the bull market will keep going strong in 2025.

When folks say "stocks are too expensive," they aren't just talking about the outright price of shares. Rather, they're talking about how much upside a company can generate per share.

One of the simplest ways to measure this is the price-to-earnings (P/E) ratio...

This metric tells us how much a stock "costs" per dollar of a company's earnings. A high P/E ratio means that stocks are expensive compared with earnings. And a low P/E ratio shows stocks are cheap.

Today, the S&P 500's P/E ratio sits at 27. But the index's average P/E ratio going back to 1990 is just 20...

That makes stocks about 35% more expensive than the long-term average.

With stocks at such a premium, bears are calling for a market sell-off in 2025. They expect a return to normal valuations – a "reversion to the mean." But here's the flaw in their logic...

The P/E ratio is a terrible short-term investing signal.

It's true that a high P/E can come back to bite shareholders in the long term. But the ratio doesn't tell us anything about when the hammer will fall...

Investment bank Charles Schwab recently did the math on this. In the firm's 2025 U.S. Stocks and Economy Outlook, Schwab analysts tested whether high P/E ratios could accurately predict one-year underperformance. Here's what they found...

The correlation between the S&P 500's forward P/E and subsequent one-year performance – going back to the 1950s – is -0.11, which means there is virtually no relationship.

So if you're thinking about what your money will do over the next year, valuation metrics are not your friend.

My mentor Steve Sjuggerud wrote about this concept in a March 2018 issue of DailyWealth. Here's what he had to say...

• Momentum works in the short run (about 12 months or less).

• Value works in the long run (about three to five years).

In other words, if you're planning your investments for this year, I encourage you to look to momentum signals instead...

One key momentum measure is the 200-day moving average (200-DMA). This signal tracks an asset's average price over the past 200 days. It smoothes out the noise of daily moves to give us the general trend.

Right now, stocks are still trading well above their 200-DMA. That means the market is still in an uptrend. Take a look...

The S&P 500's recent stumble failed to break the long-term uptrend... which means the bull market's momentum is still in place.

In short, you shouldn't bet against stocks simply because they're expensive.

The bull market looks set to continue this year. So I encourage you to buy the recent dip.

This isn't a time to sell. The bull run is still intact today... And if it continues, today's "high prices" will look like a bargain by next year.

Good investing,

Sean Michael Cummings

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