U.S. Stock Market Overvalued, Not a Bearish Reason

Piper Sandler said in a report on Monday that investors worried about overvaluation in the U.S. stock market should not sell their stocks. The Wall Street firm's portfolio strategy team, led by Chief Investment Strategist Michael Kantrowitz, estimates that the S&P 500 Index is overvalued by about 8%.

"So what?" he said when talking about overvaluation.

"An 8% overvaluation is not a reason to be bearish. As long as the 'fear' catalyst does not come from common factors such as interest rates, employment, or inflation, the stock market can maintain high valuation levels," he said.

He said that if interest rates, unemployment rates, or inflation do not soar immediately, the stock market should continue its upward trend, even if it is overvalued.

"For quite some time, almost all valuation models have shown that the market is overvalued. We always deal with this issue from the perspective of catalysts," Kantrowitz told CNBC on Monday.

In the absence of negative catalysts, Kantrowitz advises investors to screen for stocks with strong earnings momentum when building their portfolios.

"The stock market can remain expensive, but I think what investors really want to focus on are stocks with sustained earnings momentum, because these stocks may have the best performance and can maintain high price-to-earnings ratios for a longer period," he said.

He advised investors to pay attention to credit spreads to determine if there are concerns in the stock market that may signal negative equity returns in the future.

Now, they do not show signs of stress."A few weeks later, the Federal Reserve meeting was not so straightforward either, but last Friday's credit spreads hit a new low," Cantorowitz said.

He said that tightening credit spreads, a solid labor market, and continued GDP growth are all signals that investors should remain bullish, even if the stock market is slightly overvalued.