A bubble in sight? US stocks hit their most expensive level since the dotcom boom

A bubble in sight? US stocks hit their most expensive level since the dotcom boom

The recent record in US stocks, which reached a new high on Wednesdayreduced the projected earnings yield, i.e.the expected profits as a percentage of the stock pricefrom the S&P 500 index to 3.9%, according to Bloomberg data. In parallel, a selloff in Treasuries has pushed 10-year yields to 4.65%.

This means that the difference between the two, a measure known as the equity risk premium, or the additional compensation to an investor for taking on the risk of owning stocks, has fallen into negative territory and reached levels not seen since 2002, during the boom and bust of the dot-com bubble.

“Investors are saying, in essence, ‘I want to own these dominant technology companies and I’m willing to do that without much of a risk premium,’” said Ben Inker, co-head of asset allocation at investment manager GMO. “I think that is a crazy attitude.””, quoted by the Financial Times.

Analysts said the lofty valuations of U.S. stocks, dubbed the “mother of all bubbles,” are the result of fund managers seeking exposure to the country’s strong economic and corporate earnings growth, as well as a belief among many investors that they cannot afford to leave out of their portfolios the so-called “Magnificent Seven“tech stocks.

Wall Street: doubts among investors

“The questions we get from customers are, on the one hand, concerns about market concentration and how the market has become so dependent on a small group of companies,” Inker said. “But, on the other hand, they also ask: ‘We shouldn’t just own these dominant companies because they are going to take over the world?’”.

The equity risk premium, traditionally constructed, is sometimes known as the “Fed model,” since Alan Greenspan appeared to refer to it on occasion when he chaired the Federal Reserve.

However, this model has its detractors. A 2003 article by Cliff Asness, founder of fund firm AQR, criticized the use of Treasury yields as an “irrelevant” nominal benchmark and stated that the equity risk premium was not a tool. effective predictor for stock market returns.

Some analysts now employ an equity risk premium that compares stock earnings yields to inflation-adjusted U.S. bond yields. By this measure, the equity risk premium is also “at its lowest level since the dot-com era,” said Miroslav Aradski, senior analyst at BCA Research, although it is not negative.

The premium could even understate how expensive the stock is, Aradski added, since it implicitly assumes that earnings yield is a good indicator of return real future total of shares.

Given that profit margins are above their historical average, if they were to return “to their historical levels, profit growth could end up being very weak,” he said.

Some market observers resort to completely different measures. Aswath Damodaran, a finance professor at New York University’s Stern School of Business, is highly critical of the Fed’s model and noted that the correct way to calculate the equity risk premium is to use expected cash flows. cash and dividend distribution rates.

According to his calculations, the equity risk premium has decreased over the past 12 months and is near its lowest level in the last 20 years, although it is “definitely not negative.”

The valuation of stocks relative to bonds is just one measure of euphoria cited by managers. Others include the price-to-earnings ratio of U.S. stocks compared to their own history or to stocks in other regions.

“There are several warning signs here that should make us more cautious,” said Chris Jeffery, head of macroeconomics at Legal & General’s asset management division. “The most concerning is the difference between the way U.S. and non-U.S. stocks are valued.”

Many investors argue that the high multiples are justified and can be sustained. “It is undeniable that the multiple [precio/ganancias de las acciones estadounidenses] is high relative to history, but that doesn’t necessarily mean it’s higher than it should be, given the underlying environment,” said Ben Snider, senior equity strategist at Goldman Sachs.

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While some argue that high valuations are justifiable given the economic environment and earnings growth, others warn of the risks.

NYSE

According to Goldman’s model, which estimates what the price-to-earnings ratio should be for America’s blue-chip stock index by considering factors such as interest rates, the health of the labor market and other indicators, the S&P 500 is ” in line with the fair value modeled by us,” Snider said.

“The good news is that earnings are growing and, even without changes in valuations, earnings growth should drive share prices higher,” he added.

US stocks have now recovered all the ground lost since the December crash. That selling highlighted concerns among some investors that there could be a level of Treasury yields that the stock market could not live with, as bonds, considered a traditional haven, would appear too attractive.

Pimco’s chief investment officer commented this week that relative valuations between bonds and stocks “are as wide as we’ve seen them in a long time,” and that the same policies that could drive bond yields higher pose a threat to actions.

For others, the decline in the risk premium for U.S. stocks is simply another reflection of investors focusing on Big Tech, increasing the risk that concentration on a small group of big names will hurt portfolios.

“While momentum in the Mag 7s is strong, this is the year you’ll want to diversify your equity exposure,” said Andrew Pease, chief investment strategist at Russell Investments, referring to the top seven tech stocks.

Source: Ambito

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