Three months to the day after the sharpest selloff in history, Wall Street is freaking out about valuations once more.
Bank of America Corp. clients are sounding the alarm on stock prices like never before, even as they sink cash into the market in droves. Bears are finding new reasons to bristle at soaring price-to-earnings ratios, while vanishing credit premiums belie default risk in the grip of the economic downturn.
“Everything is expensive,” wrote Chris Watling, chief market strategist at Longview Economics, in a recent note. “80% of the markets we track have a valuation in the upper quartile relative to the market’s history -- the greatest percentage on record using data since the mid-1990s.”
Bulls can hit back with more reasonable interpretations of multiples, often relative to other asset classes.
Yet while renewed signs of global growth could push multiples even higher, strategists at Goldman Sachs Group Inc., including Christian Mueller-Glissmann, concede that “elevated valuations will likely become a speed limit for returns again.” The question is, just when will fundamental thresholds get breached?
Here are some of the measures investors are debating.
Dotcom Deja Vu
After a more than 40% climb in stocks from the trough of the coronavirus-driven slump in March, global equity valuations have surged to their highest since the dotcom bubble of the new millennium.
The MSCI AC World Index is trading close to a commanding 20 times forward estimates for the next year, according to data compiled by Bloomberg.
U.S. Premium
While valuation concerns are not limited to the world’s biggest stock market, multiples in the U.S. are getting the bulk of the attention.
For good reason. If you slice and dice equal-weight gauges of the S&P 500 and MSCI World indexes, the premium for an “average” U.S. share surged to the highest in at least a decade after the peak of the coronavirus outbreak. It has yet to come back to its historical range.