The Dow and broader U.S. stock market returned to record highs this week after President Trump seemed to diffuse heightened tensions with Iran following the targeted killing of General Qasem Soleimani.
Beyond the trading algorithms and mainstream talking heads, the boardrooms inside Corporate America aren’t nearly as bullish on stocks or the economy as the current rally would have us believe. In the eyes of C-level executives, equity markets in America and beyond are extremely overvalued.
Executives at big U.S. companies entered the year on a cautious note, as overvaluation risks and a weakening global economy clouded their outlook, according to Deloitte’s CFO Signals Survey.
Although the general tone of the survey was positive, business leaders expect consumer and business spending to slow towards the end of 2020. More than four-fifths (82%) of chief financial officers surveyed said they expect to take more defensive actions as the year progresses. Such measures include reducing discretionary spending and human resources.
More than three-quarters (77%) of survey respondents said stocks are overvalued. As CNBC reports, that’s the highest level in almost two years. The percentage of executives who said stocks are undervalued declined six percentage points to just 4%.
Among the issues keeping corporate leaders up at night are U.S.-China trade uncertainty and politics. Washington’s preliminary trade deal with China, which is expected to be signed next week, will provide only temporary reprieve as more contentious issues like technology transfers and intellectual property remain unresolved.
The U.S. economy has been on a downward slope since President Trump’s tax reforms went into effect back in 2018, but with recession not in the cards, corporate leaders are more concerned about what’s happening overseas.
Sixty-nine percent of respondents in the CFO survey rate conditions in North America as “good” versus just 7% who say the same for Europe and 18% for China.
2020 is expected to be China’s slowest year of expansion in three decades. In Europe, policymakers have restored quantitative easing and deeper rate cuts to stimulate growth. With Germany narrowly avoiding back-to-back quarters of contraction, the 19-member Eurozone remains on the precipice of recession.
Risks to the global economy only embolden fears that stock markets are overvalued. Case in point: The S&P 500 Index has a price-to-earnings (P/E) ratio of 18.6, which is well above the ten-year average of 14.9, according to FactSet data.
Delving deeper into the S&P 500, the price-to-sales ratio of the large-cap index is now at record highs, according to Ned Davis Research.
The U.S. stock market capped off a stellar week trading slightly lower on Friday. The S&P 500 Index fell 0.3% to 3,265.35. Eight of 11 primary sectors reported declines, with financials leading the pack. Industrials and energy stocks also under-performed the benchmark index.
The Dow Jones Industrial Average fell 133.13 points, or 0.5%, to close at 28,823.77. The technology-laden Nasdaq Composite Index settled down 0.3% at 9,178.86.
Last modified: February 3, 2020 9:32 PM UTC