By Lewis Krauskopf NEW YORK (Reuters) – The US stock market is unfazed by political turmoil in Washington and fears of violence ahead of President-elect Joe Biden‘s inauguration, and investors are focused squarely on the likelihood of another sizable stimulus package to boost the economy. the growth and launch of coronavirus vaccines. The benchmark is near record highs, while bond yields have recovered to their highest levels since the pandemic began, despite the shocking assault on the US Capitol by supporters. of President Donald Trump, an apparent divergence between the political and economic realities on the ground and the market. ratings. With Trump’s presidency ending on January 20, investors say they look forward to the trillions of dollars of additional stimulus promised by President-elect Joe Biden and his fellow Democrats, who will soon control both houses of Congress, and what it would do. they mean for economic growth and corporate profits. “It’s a market that actually says, ‘We are investing for 2021 and we see explosive economic growth in the second half of this year,'” said Art Hogan, chief market strategist at National Securities. “Because the market is a forward pricing mechanism, it frustrates people who are watching the news here and now.” Still, some investors are wondering if the market has gotten ahead of itself in a rally that has seen the S&P 500 rise more than 60% from its March lows. Rising Treasury yields threaten to undermine the appeal of stocks, which are trading near their highest valuations in 20 years, while the Federal Reserve could accelerate the timing of interest rate hikes if recovery turns out stronger than expected. Investors who have recently raised concerns include Jeremy Grantham of fund manager GMO, who said earlier this month that the rally in equities “has finally matured into a full-blown epic bubble.” Bond giant PIMCO was more cautious, forecasting on Tuesday that the US economy could recover to pre-recession levels later this year, but pointed to a number of risks, including an earlier than expected withdrawal of fiscal stimulus. Meanwhile, regulatory concerns loom over the big tech and internet stocks that make up more than 15% of the S&P 500, and wild strides in electric car maker Tesla (NASDAQ 🙂 and cryptocurrencies are bolstering. the case of those who argue the markets have entered a bubble. As markets have rallied, some investors have been in sell mode: Net outflows in equities totaled $ 2.4 billion last week, immediately following near-record withdrawals from a week earlier, customer data from BofA Global Research showed. . “The flows suggest that clients may be cautious about adding more exposure to equities given the index highs and extended valuations,” BofA Global Research said in a note Tuesday. Doubts about the sustainability of the rally were a periodic feature of the decade-long bull market that followed the 2007-2009 recession and featured prominently in last year’s rally, when many analysts and investors were shocked by the dissonance presented by rising stock prices and human and economic values. the economic misery caused by the pandemic. HIGH VALUES More recently, the market has overlooked the Capitol storming on January 6 and the subsequent push by Democrats to remove Trump from office, with the S&P 500 rising 2% over the past week. In the event of further political unrest surrounding Biden’s inauguration, investors have said they expect any associated market volatility to be temporary. Upcoming corporate earnings reports may need to be robust to support stock valuations. The S&P 500 is trading at 22.7 times future earnings estimates, well above its long-term average of 15.3, according to Refinitiv Datastream. So far, that is what was expected. Profits for S&P 500 companies are expected to rise nearly 24% in 2021 after falling 15% last year, according to IBES data from Refinitiv. “I’m not worried because I think market valuations are reflecting a return in profitability faster than people thought was possible in the spring,” Fed Vice Chairman Richard Clarida said Friday. Low interest rates and Treasury yields, which keep borrowing costs attractive to businesses and help make stocks relatively more attractive compared to bonds, have provided another rationale for the high valuations. . However, the yield on the benchmark 10-year Treasury bond has risen recently, rising to around 1.11% from 0.78% about two months ago. While that increase supported interest rate-sensitive stocks like banks, a sharp rise in returns could hurt stocks, particularly those with longer duration cash flows, like tech and growth stocks. At the same time, markets are beginning to push bets on when the US central bank could tighten monetary policy, with the prices of Eurodollar futures contracts reflecting the increasing odds of a rate hike. in June 2023, approximately three months earlier than it was trading a week ago. “On a 12-month horizon, we would advise investors to overweight equities, but for short-term positions at this time we are more neutral,” said Erik Knutzen, director of multi-asset class investments at Neuberger Berman.