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The New York Stock Exchange on Jan. 8. Photo: Xinhua/Wang Ying via Getty Images

The S&P 500 is too rich on a number of levels, according to calculations in a new paper from Ned Davis Research that examines the index's price to earnings, profits and price to sales.

What's happening: Not only is the benchmark stock index's current P/E ratio "well above fair value," S&P companies' prices relative to sales is at a record high, “well in excess of what they were in 2000 or 2007 at those peaks,” Ned Davis, the company's senior investment strategist, says in a note to clients.

Why it matters: Most Wall Street analysts predict that even after earnings declined overall and prices rose 30% in 2019, U.S. equities will rise modestly this year, by around 5%. But Davis warns "the long history of valuations tells me that over long-term periods, prices tend to revert to or below fair values."

  • That would mean earnings would need to increase significantly or equities prices would need to fall.

Further, "[T]he S&P 500 could be overstating earnings due to buybacks and other financial engineering of profits,” Davis says. "S&P 500 earnings have done much better than overall corporate profits for the last five years."

  • "Other measures, like the median price to earnings ratio — which exclude the skewed effects of very profitable and very unprofitable companies — shows the S&P 500 overvalued by nearly 30% versus the typical valuation level seen since 1964."
  • And “P/E ratios are some 80% above the long-term norm,” Davis notes.

The bottom line: "[T]he trend is up and the Fed is friendly," Davis says. But the numbers are the numbers. "This is a real concern."'

Go deeper:

Go deeper

Blockbuster Supreme Court day

Photo: Drew Angerer/Getty Images

The Supreme Court will give conservatives a lot of what they want — but not quite everything.

Driving the news: It voted 9-0 to carve out religious objections to same-sex marriage, saying foster-care agencies have a First Amendment right to turn away same-sex couples. But it also voted 7-2 to preserve the Affordable Care Act, saying Republican attorneys general did not have the legal standing to bring their lawsuit.

Biden signs bill making Juneteenth a federal holiday

President Biden and Vice President Harris with members of Congress after the signing in the White House on June 17. Photo: Jim Watson/AFP via Getty Images

"Great nations don't ignore their most painful moments," President Biden said before signing legislation Thursday that establishes Juneteenth as a federal holiday, just two days before the occasion.

Why it matters: The holiday, which will be known as Juneteenth National Independence Day, is now the 11th annual federal holiday and the first one established since the creation of Martin Luther King Jr. Day in 1983.

Dan Primack, author of Pro Rata
1 hour ago - Podcasts

House antitrust chair discusses the bills to bust up Big Tech

House lawmakers last week introduced a series of five bipartisan bills designed to curb the power of Big Tech, targeting Apple, Amazon, Facebook and Google in all but name.

Axios Re:Cap speaks with Rep. David Cicilline (D-R.I.), chair of the House antitrust committee and a sponsor on most of the bills, to learn how he plans to get these measures over the finish line. The congressman from Rhode Island also faces a slate of other priorities and in the wake of a spending package to bolster the U.S. tech sector’s ability to compete with China.