Why Stocks Might Keep Rising

Fears over 'wildly overvalued' stock prices may be wildly overblown.

There seems to be an increasing concern that stocks have become wildly overvalued, especially in light of rising interest rates.

However, somewhat overvalued U.S. equity prices can continue to rise if price/earning multiples keep expanding.

Further P/E inflation is what BCA (Bank Credit Analyst) is expecting. They point out “a clear link between equity multiples and the yield curve [with] a steeper yield curve indicative of better growth and very easy monetary policy. As such, it often coexists with expanding equity multiples.”

If we are entering a rising rate environment, a steeper yield curve is a likely stay. BCA notes that “the long end of the curve will be held high by real economic growth and better profitability, while the short end of the curve will be suppressed by the Fed."

BCA Chart

About the Author

Barry Ritholtz

Barry Ritholtz

Barry Ritholtz is a Bloomberg View columnist writing about finance, the economy and the business world. He started the Big Picture blog in 2003 and is the founder of Ritholtz Wealth Management, an asset management and financial planning firm. Ritholtz was previously the chief executive officer and director of equity research at FusionIQ, a quantitative research firm for which he continues to consult. He is the author of "Bailout Nation" and is a graduate of Stony Brook University and Yeshiva University's Benjamin N. Cardozo School of Law. He lives on New York's Long Island with his wife.

Copyright 2015 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


Advertisement. Closing in 15 seconds.