The stock market, it appears, is both hugely expensive and full of bargains.
Consider biotechnology stocks. According to a research report out Thursday from Bank of America Merrill Lynch, biotech stocks are the cheapest they have been since at least 1992, as far back as their data goes. The P/E ratio of biotech stocks, based the estimate of what this year's earnings will be, is 14, according to the report.
That's more than 20 percent lower than the forward P/E of all the stocks in the S&P 500, which is approaching 18. Typically, biotech stocks trade at a 40 percent premium to the market, so they are historically extremely cheap, relatively.
And biotech is not alone. Telecom stocks are trading at a 37 percent discount to where they have historically traded relative to the market. Health care overall is at a 26 percent discount based on the same measure. Tech, even after the recent run-up, still looks slightly cheaper than average, again relative to everything else and history.
Much of the narrative of the market right now is that investors are either too complacent or downright euphoric. The VIX, the measure of volatility that is typically called the market's fear gauge, dipped below 10 for the first time in a decade. The Dow Jones Industrial Average, the Nasdaq Composite and the S&P 500 have all recently crossed milestones and are near all-time highs. High-yield bond spreads are historically low.
Investors were quick to buy on the hope that President Trump would cut taxes and increase infrastructure spending, even though it's clear that it will be a year or more before that happens, if ever. Stock valuations are elevated. The Shiller P/E, a favorite of many because it supposedly adjusts out the cyclicality of earnings, is 75 percent higher than its historical average.
And yet biotech stocks are not just cheap, they are two-and-a-half-decades cheap. Part of that, of course, is that this is measuring relative value, and some sectors will always be cheap relative to the market while others will be more expensive.
But they are cheap even on an absolute basis. Shares of drugmaker Abbvie trade at 12 times this year's expected earnings, and yet those earnings are expected to grow, on a per-share basis, nearly 24 percent this year. Collectively, the earnings of the biotechs in the S&P 500 are supposed to increase nearly 7.5 percent this year.
There may be some good reasons biotech stocks are cheap right now. There's a lot more pricing pressure than there has been in the past. Regulators are cracking down on price increases. And a number of potential blockbuster drugs have not passed trials or stalled. But there are always fundamental reasons to argue particular sectors or stocks in general should be cheap.
The degree to which investors ignore those fundamentals is a pretty good gauge, or at least as good if not better than the VIX, of whether the market is in a bubble. Biotech suggests the level of excitement for stocks is not unhealthy yet.