Is the market overvalued?

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Wall Street took a timeout on its rally yesterday, as all major indexes finished the day in red on the first day of a shortened week of trading. The Federal Reserve’s reaffirmation that rate cuts remain on the table for this year led to another leg in the rally. With that rally being digested, more analysts are questioning the valuation of the market. Sam Stovall, chief investment strategist at CFRA Research, pointed out that stocks have become more expensive with the S&P 500 trading at a 33% premium to its average P/E ratio over the last 20 years. - “We’re coming off of a post-FOMC high,” said Stovall. “The market is getting more and more vulnerable to a market decline or a pullback in prices.” Sam Stovall, chief investment strategist at CFRA Research (Photo: Bloomberg) Here’s the key to remember — P/E ratios are not a good measuring stick for the valuation. Companies can grow earnings to lower the P/E ratio over time. For example, Tesla and Nvidia’s P/E ratios were through the roof but their strong earnings growth have made their P/E ratios under 100 now. At the same time, it means that companies must deliver strong earnings growth to justify higher P/E. So, the question is whether they can. The answer will come during the next earnings season. Until then, we will focus on this Friday’s release of February personal consumption expenditures price index. Economists expect inflation to continue to accelerate, but Stovall doesn’t expect the market to react violently. - “It’s sort of like dropping a ping-pong ball on a table, the first bounce is the greatest. When the PCE finally comes out, it’s like, okay, been there, done that. I think investors are less concerned by what it’ll say,” said Stovall. “There’s nothing that I can see on the horizon that would upend investors’ current expectations.” The current sentiment on Wall Street is that inflation will be ups and downs. The next data point can be an acceleration, but many investors are likely to dismiss it as a temporary thing. Top Insurance Stock to Own Right Now Today’s Pick: Arch Capital Group Ltd. (ACGL) What’s the top benefit of owning a top insurance stock? The best insurance companies offer a double-dip of revenue streams: - They earn premiums for insurance that they underwrite, or collect premiums for policies they acquire in the case of reinsurance. - Premiums become a “float” where an insurance company can invest to earn income over the lifetime of a contract. As long as their underwriting practices avoid excess risk, these two income streams make insurance one of the best American businesses. But of course, it’s all about managing risk. If you take on high-risk contracts, you’re going to go broke paying for all these accidents. In the case of Arch Capital, the company managed risk well by reducing volatility while maintaining industry-leading returns: (Source: Arch Capital) The result? A book of business that grew all but two years from 2001 to today! Over that time period, the book value of the company’s insurance contracts and their assets has averaged 15.3% annual growth. (Source: Arch Capital) And Arch Capital is priced wonderfully because their price to book is solid at 1.94. Let me put this differently. At its closing price yesterday -- minus its 15% debt-to-capital – about half of the share price goes toward just the book value of Arch Capital’s assets. That’s before you even factor in future earnings. Beyond book value, Arch Capital has grown its revenue very, very steadily since 2014 which is a good value for Arch Capital’s 7.83 P/E. (Source: MacroTrends) But are they taking a lot of risk? Arch Capital’s track record says “no”. Assuming the company continues using the same practices that it has used for the past two decades, it’ll continue to outperform the industry. - Here’s why. Arch Capital has produced higher returns than its peers while still maintaining low volatility. Just look at how its returns and volatility compare to peers like Progressive since 2002: (Source: Arch Capital) Bottom line: Arch Capital looks like a steal at a 7 P/E when it’s growing as quickly as they are, especially when its insurance and reinsurance divisions are both growing quickly. So, this stock offers you timeless protection against volatile markets. With its low P/E, you can comfortably expect an annual double-digit percentage return from this stock. [EARN WHILE YOU LEARN! JOIN OUR FREE LIVE TRADING SESSION!](       © All Rights Reserved, Trade Alliance [Unsubscribe]( | [Manage Preferences](