U.S. equities and stock exchange traded funds are hovering around their highs, but analysts caution that this market is ripe for a correction. Still, once the equities markets ebb, we might witness even higher highs, says S&P Capital IQ.
On April 2, the S&P 500 hit its all-time high, passing the previous high last seen on Oct. 9, 2007, according to a S&P Capital IQ research note. Additionally, as of April 2, the S&P 500 gained 29% off the Oct 3, 2011 low, or 3% lower than the average 12-month recovery from a severe correction or mild bear market since the Great Depression.
Consequently, S&P analysts argue that the S&P 500 may be overpriced.
“S&P believes the ‘500’ may have borrowed a bit too much from the future, and could now be in the early stages of a widely anticipated pullback,” Sam Stovall, Chief Equity Strategist at S&P Capital IQ, said in the note.
“However, we don’t believe the decline will be too deep, as the Q1 earnings expectations bar has been set quite low,” Stovall added. “Once this drawdown is complete, we think higher highs will soon be seen.” [Earnings Growth Can Sustain ETF Rally: iShares]
Stovall also pointed out that the S&P 500 is estimated to record its 10th successive quarterly increase in trailing 12-month operating earnings per share. However, S&P Capital IQ calculates that the S&P 500 EPS will only rise by 0.96% for the first quarter, compared to an increase of 19.7%, 19.2%, 176% and 8.4% in the four quarters, respectively, of 2011. Additionally, six of the 10 sectors in the S&P 500 are projected to experience year-over-year drops.