Are We In Global Bubble Territory? Not Yet

By:  Russ Koesterich, BlackRock Chief Investment Strategist

With the exception of emerging market equities, stocks are having an extraordinary year, particularly after accounting for the fact that global economic growth has disappointed this year. Given the magnitude of the gains, investors are increasingly concerned that global stocks are once again getting overvalued, if not in an outright bubble.

I last addressed this topic in mid-August. At the time, my view was that valuations were not yet an impediment to further gains. Since then, global equities have advanced roughly 7% to 8%. Yet despite the additional gains, I still don’t believe it’s accurate to describe stocks as in a bubble.

Consider these four facts:

• Valuations are no longer cheap, but they are still a long way from the peaks seen in previous cycles. U.S. stocks trade for around 2.5 times book value and for 16.5 times trailing earnings. Looking at the last three major market peaks – 1987, 2000 and 2007 – price-to-earnings (P/E) ratios were respectively 23, 30 and 17.5. The price-to-book ratio, meanwhile, peaked at close to 5 in 2000 and 3 in 2007.
• Valuations look more reasonable outside of the United States.  International stocks are 30% to 40% cheaper than U.S. stocks.
• On a relative basis, the earnings yield on stocks still compares favorably with the fixed income alternative. Compared to bonds, which have been bid up through central bank intervention, stocks still look cheap.
• Despite strong in-flows year to date, many investors are still underweight equities.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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