U.S. stock valuations remain attractive

Goldman Sachs said that using valuations as a signal to exit stocks is ineffective, and investors should continue to be optimistic about U.S. stocks this year.

Goldman Sachs consumer and wealth management chief investment officer Sharmin Mossavar-Rahmani pointed out that investors should continue to be optimistic about the US stock market this year, although valuations are at record highs and the Fed is preparing to tighten monetary policy, but use valuations as a signal to exit the stock market Effectively ineffective, investors could miss out on huge returns if they exit the market out of fear of overvaluation.

Sharmin and his team pointed to the S&P 500 index, which measures the performance of large-cap U.S. stocks, as an example. In December 2016, the index entered the tenth decile of equity valuations in the post-World War II period. With a total return of 133% through 2021, the index is rising despite expensive stock market valuations. While many investors see similarities between today's U.S. stock market and the dot-com bubble in late 1999, Goldman sees significant differences, including the breadth of gains.

The S&P 500's rise was driven by a small group of stocks, including Meta, Apple, Netflix, Google's parent Alphabet, Microsoft, Amazon, Nvidia and Tesla, among others. Goldman said these stocks accounted for 27% of the S&P 500's total market capitalization, but noted that the index's strong returns last year were broad-based. Goldman Sachs said that even if the eight stocks mentioned above were eliminated, the return would still be as high as 24.9%.

"It's not just a few stocks that are driving this bull market," the report said. "Compared to 2021, returns were much more distorted in 1999." In 1999, the S&P 500 returned 21%, while An equal-weighted version of the index returned 10%, compared with a median stock return of just 1%.