S&P 500 back within touching distance of all-time highs

The technicals on the S&P 500 have been looking better and better all this week, and the index is now just 1.1% away from marking a new all-time high. Will the non-farm payroll numbers be the driver for a break through this level? On the other hand, valuations are stretched.

The S&P 500 has managed to close above 2100 for the first time since 20 April and is now a mere 1.1% away from a new all-time high. ADP employment for May was in line with market expectations, which was readily greeted by a market eagerly awaiting the release of the non-farm payrolls numbers. Just as markets had begun to increasingly price in a July rate hike, a week of mixed US data started to cast doubt on this eventuality. US markets were reassured by the ADP employment print and now look primed to break sharply higher should NFP come within market expectations.

The technicals on the S&P 500 have been looking better and better all this week. The trend indication of the Ichimoku cloud returned to uptrend territory again on Monday. With strong technicals and a close above the important psychological level of 2100, this bodes well for the session today and into next week.

On the other hand, valuations at an index level continue to look highly stretched. The price-to-future earnings ratio on the S&P 500 is currently sitting at 17.9, a full 1.7 standard deviations above the long-term average. This a level that has often prompted sharp reversals in the index.

The drivers of the index have changed dramatically over the past month. The rally from February was driven by short-covering in the energy and materials space. But investors have rotated out of these sectors and much of the gains of the past month have been driven by previously out of favour sectors such as information technology, healthcare and financials.

While the valuation of the index as a whole looks increasingly stretched, the energy space stands out with the most dissonance between price and future earnings. Valuations in energy stocks seem to be looking through the already improved oil price of close to $50 and are valuing the stocks with an oil price of $70 or higher. US consumer staples stocks also look to be trading at concerning valuations and ones that can’t be explained away by a difficult-to-forecast commodity price.

To emphasise the point, consumer staples also stand out as increasingly overvalued in enterprise value-to-EBITDA (earnings before interest, tax, depreciation and amortisation) terms as well.

Two stocks that look primed to continue to build on a strong session are Humana and Marathon Oil.

News that the buyout offer from Aetna for Humana may get the go ahead from the courts helped the stock see its biggest one-day move in over a year. There’s a good chance this momentum will continue into Friday’s session with the technical picture increasing pointing to further gains.

After gaining 3.7% this week, Marathon Oil looks primed to push higher again. The decline in EIA crude oil inventories seems to have neutered the disappointment from an uneventful OPEC meeting. This week’s momentum could continue to see the stock move high enough to retest $14.90.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.