The U.S. stock market isn’t overvalued, but it’s outlook is still bleak, Capital Economics said in a note this week.
“Even though the valuation of the S&P 500 is not especially stretched in our view, we still think that the index will end next year more than 15 percent below its current level, at 2,300,” the note said. “It has tended to fall in the past once Fed tightening has begun to take a toll on the economy. And while we are not projecting a recession, we do expect the economy to slow significantly, partly as a result of tighter Fed policy.”
While the higher Treasury yields that will likely go hand-in-hand with tighter Fed policy can make equity valuations less appealing, the yields aren’t likely to rise much further, Capital Economics said.