The S&P 500 is on a tear, and a rate cut could fuel its run. Are US megacaps overvalued?

The S&P 500 remains on a tear, unbothered by drama surrounding the US elections: It has posted gains in nine of the last 11 weeks, Bloomberg notes, including 2% last week as a steady slowdown in the labor market boosted expectations the US Federal Reserve could start to cut interest rates as early as September.

By the numbers: The S&P 500 was up 0.54% on Friday to close at 5,567, while the Nasdaq Composite edged up 0.90% to 18,352.76. Both indexes ended the week at record highs after labor data released on Friday showed US unemployment up slightly at 4.1% — its highest November 2021.

Cooler US jobs data could prompt the Fed to start trimming interest rates in the fall, Reuters reported. “This report puts the Fed in a comfortable spot,” said Peter Cardillo, a chief market economist at institutional brokerage firm Spartan Capital Securities. “If this continues next month, with no increases in hourly wages, then I think we’ll see a rate cut in September and another one in December.”

Remember: A rate cut will almost-inevitably see investors allocate more capital to equities.

But it may be time to moderate your expectations for US equities in the coming decade. While valuations are admittedly bad tools to use when trying to time the market, Bloomberg still notes that that the S&P 500 is trading at 26x earnings — higher than on any single election day as far back as 1990. That suggests “the elevated state of equities may be reason to lower expectations for their performance under whoever wins the election in November,” it writes.

A decade of “Meh” in the making? “Today’s lofty valuations for US megacaps suggests significant underperformance over the coming decade, and because they make up such a dominant share, returns for the overall US market are also likely to be pretty muted,” Richard Bernstein Advisors’ deputy chief investment officer, Dan Suzuki, told the business information service.

THE MARKETS THIS MORNING-

Major Asian benchmarks are all in the red this morning, and futures point to selling pressure on Wall Street at today’s market open. Major European benchmarks, meanwhile, were in the green in overnight trading — the big exception being France, where CAC 40 futures are down slightly as the country looks forward to what some think could be weeks of horse trading to form a new government.

THE CLOSING BELL-

The DFM rose 0.1% on Friday on turnover of AED 236.2 mn. The index is up 0.3% y-o-y.

In the green: Orascom Construction (+9.9%), GFH Financial Group (+5.6%) and Dubai Islamic Ins. and Reins. (+3.6%).

In the red: Ithmaar Holding (-3.9%), Al Salam Sudan (-2.7%) and Emirates Reem Investments Company (-2.0%).

Over on the ADX, the index rose 0.1% on turnover of AED 2.52 bn. Meanwhile, Nasdaq Dubai was up 0.1%.

CORPORATE ACTIONS-

GFH offloads 5% of issued capital: Bahrain-based Islamic investment bank GFH Financial Group sold over 191 mn of its treasury shares — equivalent to 5% of the firm’s total issued capital — to Ahmad Bin Mohammad Al Qassimi, according to a disclosure (pdf). The share sale reduces the total number of treasury shares to 58.8 mn, representing 1.53% of GFH’s capital.