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With US stocks sitting at record highs, and the S&P 500 index the most richly valued in more than a decade, some investors have begun to see darker clouds gathering on the horizon.

The S&P 500, a broad measure of the stock prices of America’s largest companies, logged a new record high on Friday, having rallied by almost 10 per cent since last year’s election to 2,351.2.

But a more ominous statistic lurks below the surface: the index’s forward price-to-earnings ratio climbed last week to 17.6 times, the first time the key valuation metric has risen to that level since 2004, and above the average over the past 20 years of 17.2, according to FactSet data.

US equities bourses were closed on Monday for President’s Day.

While Wall Street analysts note that expanding valuations alone are typically not enough to derail a market advance, there have also been other indications of potential turbulence ahead.

“We continue to believe a near-term S&P pullback of the 5 per cent to 7 per cent variety is likely,” said Peter Cecchini, chief market strategist at Cantor Fitzgerald.

Mr Cecchini pointed to several potentially worrisome factors. For one, the S&P 500 has continued to march to new highs, but it has begun to do so at a slower rate. At the same time, there has been a “collapse” in volatility, leaving expectations among options traders for tumult over the next three months higher than realised volatility across all of the sectors that Mr Cecchini tracks.

Japan’s Nikkei 225 index has also stalled since the start of the year, rising 0.63 per cent, compared with the S&P 500 that is up by 5 per cent.

The Nikkei “peaked ahead of tops in the S&P in 2000 and 2007,” Mr Cecchini said. “Keep in mind, the S&P is usually the last risky asset that market participants sell”.

Goldman Sachs strategists, meanwhile, have a muted view for US stocks. The investment bank expects the S&P 500 to climb further over the next three months to 2,400, but then pull back to 2,300 over the following nine months — which would represent a price decline from current levels of about 2 per cent.

The Goldman strategists also flagged up numerous risks to stocks globally, including “growth momentum slowing, disappointments in US policy, rates rising too far too fast, and European politics”.

“While we do not think any of those risks are imminent, we remain overweight cash in our asset allocation — over both 3 and 12 months — in order to hedge,” they said.

Copyright The Financial Times Limited 2017. All rights reserved.
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