Recent times have seen a strong rebound in the US stock market, with the S&P 500 index hitting historic highs this month. Tech stocks with high valuations have surged, retail speculative trading is thriving, and the market investment atmosphere is showing “euphoria.” However, several asset management companies and analysts have issued warnings, pointing out that market valuations are approaching historical highs. The surge in investment activities and leverage levels are raising concerns about bubble risks, despite the stock market continuously hitting new highs amid resilient economy and optimistic corporate earnings.
Investment management firm PIMCO’s Chief Investment Officer Dan Ivascyn expressed concerns that the current stock market environment is reminiscent of the late 1990s to early 2000s dot-com bubble period when stock prices were overly hyped, leading to a market crash. Investors nowadays are more likely to focus on gambling in the stock market rather than rational evaluation of fundamentals, hoping for overnight riches like buying lottery tickets.
The price-to-sales ratio of S&P 500 component stocks has exceeded 3.3 times, reaching historically high levels, indicating that stock pricing has reached unprecedented levels. Barclays Bank’s “equity euphoria indicator” has surpassed normal levels by two times, entering the realm of asset bubble risks. Stefano Pascale, head of US stock strategy at the bank, pointed out that this reflects an excessively optimistic and fervent stage in the market.
Analysts at Deutsche Bank have noted a trend of investors borrowing money to trade stocks, with total margin debt exceeding $1 trillion in June, historically high levels. Rob Arnott, founder of asset management firm Research Affiliates, highlighted that the market currently holds high expectations for companies dominating the AI sector, giving them exceptionally high valuations as if these companies won’t face any competition in the long run and can monopolize the market. At the same time, investors fear missing out on profit opportunities by selling these popular stocks too early, making it difficult to make decisive decisions.
Arnott pointed out that various valuation indicators of the S&P index, such as price-to-sales ratio, price-to-earnings ratio, price-to-book ratio, dividend yield, are nearing historical highs. He likened heavy investment in a few large tech stocks in the index to picking up coins in front of a steamroller, highlighting the potential dangers involved.
The issue of high government debt has had no impact on the US stock market, which continues to perform strongly. The current rebound is led by large tech stocks like Nvidia and Meta, which have surged by 100% and 50% respectively since April.
Analysis by the Financial Times suggests that aside from tech stocks hitting new highs, the resurgence of meme stocks in 2021, with retail investors rushing to buy popular trending stocks like GoPro and Krispy Kreme, reflects high speculative sentiment in the market and weak risk awareness.
In a report, BofA strategist Michael Hartnett mentioned that the larger the size of retail investors, the greater the liquidity, leading to bigger bubbles.
(*This article referenced reporting from the Financial Times*)