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Dow Pounds to Best Quarter Since 2009 But Valuation Risks Spike

Last Updated September 27, 2020 2:53 PM
Sam Bourgi
Last Updated September 27, 2020 2:53 PM

By CCN.com: The Dow and broader U.S. stock market rallied on Friday, capping off the best quarter since the financial crisis and reaffirming that the bull market has yet to run its course.

Dow Jumps, Dragging S&P 500 and Nasdaq With It

The Dow Jones Industrial Average climbed triple digits, building off a triumphant start to the trading session for U.S. stock futures. The blue-chip index climbed 211.22 points, or 0.8%, to reach 25,928.68 Caterpillar Inc. (CAT) and UnitedHealth Group Inc. (UNH) were the Dow’s top performers.

The broad S&P 500 Index of large-cap stocks gained 0.7% to 2,834.40. Nine of 11 primary sectors reported gains, with health care stocks climbing 1.2% on average. Industrials and information technology shares also outperformed the benchmark.

Meanwhile, the technology focused Nasdaq Composite Index climbed 0.8% to settle at 7,729.32.

The stock rally is far from guaranteed. Read Does this Chart Spell Doom for the S&P 500 Index? courtesy of Hacked.com.

Are Stocks Overvalued?

dow jones industrial average, djia
As the Dow approaches 26,000 again, signs of overvaluation return. | Source: REUTERS / Jeenah Moon

Wall Street’s major indexes have recorded gains of between 11% and 17% this quarter, their best stretch since 2009 when the economy was slowly pulling out of the Great Recession. For the S&P 500, it was the best start to a year since 1998.

The market’s first-quarter performance marks an impressive turnaround from a disastrous end to 2018. By Christmas, the S&P 500 and Nasdaq Composite Index had entered into a bear market, which is defined as a 20% drop from the most recent high.

A cocktail of factors weighed on the market last quarter, including a U.S.-China trade war, slowing global growth, and a hawkish Federal Reserve. While the Fed has all but capitulated this year, the other two factors remain a major source of risk. Just this past week, the Commerce Department downgraded its estimate of fourth-quarter growth to 2.2% annually. It had initially reported a gain of 2.6%, which was still well below the previous two quarters. GDP growth surged 4.2% annually in the second quarter on the heels of massive tax cuts.

Combined with the above, Q1 2019 is expected to be an extremely weak earnings quarter. According to FactSet , nearly three-quarters of S&P 500 companies to issue Q1 guidance have said they expect earnings results to be negative. A shaky earnings quarter could add to growing fears that stock prices are significantly overvalued.