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Centre funds says stocks overvalued by 30%

Adam Shell
USA TODAY

The stock market has been red-hot since Election Day. But one Wall Street pro says the market may be getting ahead of itself, arguing the U.S. equity market is overvalued by about 30%.

A trader works on the floor of the New York Stock Exchange (NYSE) at the start of the trading day in New York.

So says James Abate, chief investment officer at Centre Asset Management. What investors are missing, he says, is that U.S. stocks, which had already been driven up to pricey valuations on the belief interest rates would stay “lower for longer,” now face headwinds from rising rates and an overly optimistic bounce-back in the pace of GDP and corporate earnings growth.

With the Federal Reserve set to hike short-term rates next week and the 10-year Treasury note spiking to its highest level in a year, the new investment script calls for a sharp jump in profit growth to justify the market’s current frothiness.

The problem is, with the business cycle now in its eighth year of recovery, it’s unlikely the economy and earnings can pick up enough speed no matter how growth-friendly policies of president-elect Donald Trump will be.

Says Abate: “The market’s expecting 10% profit growth for the foreseeable future. The problem? The growth rates needed to justify stocks at current valuations are normally seen when we’re coming out of a recession. But we’re nowhere near that. We’re at the later stages of the business cycle.”

While many of Trump’s policies will be good for the economy and for workers’ wages, “that doesn’t necessarily translate into a good stock market,” Abate says. In short, what’s good for workers might not be great for corporate profit margins. And if earnings don’t come through as hoped, the market will have to trade lower, Abate argues.

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