S&P 500 Index: A sharp correction is not imminent – DBS Bank

Since 2020, the S&P 500 is up 22% while the US Technology sector has seen outsized gains of 51%. The robust rally has triggered valuation concerns in the Technology space. Data, however, suggest otherwise.  The expectation of strategists at DBS Bank is for the broad uptrend to persist, albeit at a slower pace.

Key quotes

“It is not untrue that on a forward price-to-sales (P/Sales) basis, valuation for US Technology is looking stretched at 6.5x. But this ratio belies the fact that profitability for US Technology companies is on the rise. This is affirmed on a forward P/E basis, which shows valuation for the sector is nowhere near the levels seen during the dot-com bubble.”

“Unlike what we saw during the dot-com bubble, the S&P 500 relative to M2 money supply ratio is only broadly in line with the long-term average – despite the recent rally in the S&P 500.”

“The AAII Bull/Bear ratio reflects the market sentiment of financial advisors. Currently, the ratio of 1.7 is broadly in line with the long-term average and this suggests that sentiment is not at an extreme.”

“When the percentage of stocks closing above their 200-dma crosses above the 80% mark, the likelihood of a pullback in the year-on-year change for S&P 500 is on the cards. It is to be noted that a deceleration in the rate of change need not necessarily mean that the S&P 500 will enter a negative correction mode. Instead, it suggests that the market can continue to grind higher, albeit at a slower pace. This was what happened when the indicators breached the 80% mark on previous occasions.”