REUTERS/Steve Marcus
- Wharton professor Jeremy Siegel rejects the notion that US stocks are overvalued, saying they are in fact "underpriced".
- Billionaire investors Jeremy Grantham, Bill Gross and Jeffrey Gundlach have recently said equities look overpriced.
- "Even if there is a mild recession, these are great long-term values," Siegel said, referring to the current levels in stocks.
A growing chorus of Wall Street experts have recently warned US stocks look too expensive, and are due for a correction.
Billionaire investors Bill Gross and Jeremy Grantham have said equities are significantly overvalued, with the latter predicting the S&P 500 index could crash by as much as 50%. DoubleLine Capital CEO Jeffrey Gundlach and JPMorgan strategists also have voiced similar views in recent weeks.
But not everyone's buying it.
Wharton finance professor and markets guru Jeremy Siegel suggests just the opposite might be the case.
US stocks are still offering "great long-term values" with their so-called earnings yield— a key gauge of returns — coming in at about 6%, well above the inflation-adjusted rate of about 2.4% offered by the bond market, the author of "Stocks for the Long Run" wrote in his weekly WisdomTree commentary.
While the so-called equity risk premium — the extra return on stocks over government bond yields — has fallen to a multi-year low of around 3%, it still doesn't establish shares have become too pricey, he added.
'Great long-term values'
"We have a market that's priced at 17.5 times next year's earnings estimates and ex-technology stocks are selling three to four points lower. Even if there is a mild recession, these are great long-term values. Stocks are almost to levels where earnings yields are above 6%, which equate to real returns going forward," Siegel wrote.
"Stocks are still priced for much better long-term returns and a 3% equity premium, while lower than it was for last decade, does not mean stocks are above fair value. They are now underpriced in my estimation," he added.
Some experts have pointed to the stock market's historically high levels relative to bonds, and the drop in the equity risk premium, to argue that shares have become too expensive and a selloff may be looming.
In recent months, the S&P 500 climbed to levels last seen during the peak of dot-com boom, relative to an index that tracks the US corporate bond market, according to data from global analytics platform Koyfin.
The metric last surged this high in the spring of 2000 — and that was followed by a multi-year meltdown in stocks that saw the S&P 500 crash 50% between March 2000 and October 2002.
"Equity risk premium is near its worst ever level going back to 1927. In the 6 instances this has occurred, the markets saw a major correction & recession/depression - 1929, 1969, 99/00, 07, 18/19, present," research firm MacroEdge said in a recent post on X.