- According to Wharton professor Jeremy Siegel, the stock market’s current valuation represents “a really good deal” for investors.
- The S&P 500 is trading at a forward price-to-earnings ratio of about 19x, slightly above its historical average.
- Siegel expects the stock market to remain in relatively good shape through the end of the year despite higher interest rates and a rising US dollar.
According to Wharton professor Jeremy Siegel, long-term investors who are trying to build wealth should continue buying stocks.
Siegel told CNBC on Tuesday that the stock market’s current valuation represents “a really good deal,” even though investors are concerned about a potential recession, increased interest rates and higher inflation.
According to FactSet data, the S&P 500 currently trades at a forward price-to-earnings ratio of about 19x, which is slightly above its five-year and 10-year historical averages of 18.7x and 17.5x, respectively.
Siegel said current stock market dynamics suggest long-term returns of at least 5% after inflation.
“If you’re a long-term investor, this will be a very good margin for building wealth over the long term,” Siegel said.
For the short term, Siegel expects the stock market to be in relatively good shape through the end of the year, despite persistent concerns about inflation and what the Federal Reserve might do in response to that inflation.
That’s because the economy is in good shape, and strong economic data, even if it means more interest rate hikes, is ultimately good for stock prices.
“Looking at the strength of the economy, and that’s what the stock market likes. That’s why, when we have a little bit higher PPI, a little bit higher CPI, if we get good real economic data out there, you see a rally in the stock market. And that’s why I think by the end of the year we may still have a strong, not a boom, but a strong equity market,” Siegel said.
The Fed will make a decision on interest rates at the conclusion of its meeting on Wednesday, with the market currently expecting the Fed to pause its interest rate hikes this month and possibly raise rates once more before the end of the year.
Finally, investors should not expect any interest rate cuts from the Fed as this would likely happen only in the event of some kind of economic shock.
“I think the only thing that’s really going to push them toward lower rates is a rise in the unemployment rate, a major downturn in the employment picture,” Siegel said. And this will probably be bad news for the stock market.