Some of the strongest gains can occur once stocks become expensive, and stocks are

The stock market looks expensive, and valuation is in the top decile since 1960, but strong gains could still be ahead.

Evercore ISI analysts raised their 2024 year-end S&P 500 (SP500) price target to 6,000, at around 24x trailing 12 months EPS.

And according to an Evercore ISI Equity and Derivates Strategy macro note on the history of several past expensive markets, some of the strongest gains can occur once stocks become expensive.

The 1993-1995 market became “expensive” because of a contraction in the S&P 500 (SP500) EPS, which went down 7% year-over-year, and the aftermath of the 1990-1991 recession.

Analyst Julian Emanuel wrote that the 1993 expensive market peaked at 30x trailing 12 months that year and did not become “reasonably priced” until early 1995, after a 37% EPS growth and a Fed hiking cycle in 1994, “whose severity 2022-2023 compares with.”

That time also saw a technological revolution — the start of the internet age — that guided the economy to experience a “soft landing.”

“Imagine then as a long-term investor the generational opportunity cost of selling in 1993-1994 because valuations were too high,” said Emanuel.

Then, during 1998-2000, there was an expensive market that was built on the excitement around technology “that had previously been ‘bubbling’ since Netscape Navigator’s IPO in August 1995,” he said. “Stocks became expensive in early 1998, paused during the brief LTCM/exogenous shock selloff in Summer 1998, then stabilized with help from the Fed to continue rallying into the Y2K ‘Bubble’ top a full two years and +41% after first becoming ‘expensive.’”

There, earnings rose 14% after they went down 2% in 1998. The risk/reward attitude, however, did decline until 2001.

Finally, the 2020-2021’s expensive market was “one of a kind,” said Emanuel. Because of the pandemic, earnings bottomed -14% in 2020, only to rebound 48% in 2021.

This year’s “expensive market” is driven by the AI revolution, the anticipation of the Fed to cut interest rates, and the prospect of higher earnings growth and robust breadth, he said.