Bernstein says S&P 500 is trading 23% above its ‘fair value’

Bernstein strategists expressed the view that U.S. stocks may not fully account for the possibility of interest rates remaining elevated for an extended period.

They highlight that the S&P’s valuations, with a price-to-earnings ratio of 19, are roughly 23% above what they consider to be “fair value.” This assessment is based on the historical relationship between nominal bond yields and market multiples over the past two decades.

Based on Thursday’s closing price, this indicates the should be trading just below 3400.

Even when excluding the seven largest tech companies, the market multiple remains 8% above the fair value, given a nominal yield of 4.75%, according to their analysis. An 8% premium suggests the S&P 500’s ‘fair value’ of around 3830.

The strategists believe that the market has not yet priced in the scenario of interest rates remaining at higher levels for an extended period.

Earlier this year, the analysts said that they expect the returns from U.S. stocks to come down in the years ahead.

Instead of the robust 12% annualized total return experienced in the previous 10 years, the analysts now project a more modest 4% return.