Popular American stock indices like S&P 500, DJIA and Nasdaq 100 have once again hit record highs. As a result, from the low that appeared in 2009, the S&P 500 index increased by over 360 percent, DJIA by 325 percent, and the Nasdaq 100 by almost 700 percent. All this in 10 years, and such a significant percentage increase can immediately suggest the emergence of a bubble and the feeling that the shares are too expensive. Is that right?
Contrary to popular belief, it seems that US stocks are neither expensive, nor we are observing a speculative bubble in this market. Despite the fact that share prices have risen significantly in nominal terms, this is covered by companies' results and higher profits and current valuations do not seem to be a bubble.
The estimated P/E ratio for S&P 500 shares for the next year is around 18, which is not pointing for a bubble. It is also a lower value than that observed at the beginning of November, which is around 23.5. In other words, the market at the current level of share prices expects a further increase in corporate profits. Thus, the return on investment in shares still appears to be higher than the return on investment, e.g. in bonds, whose interest rate for 10-year bonds is below 2 percent.
What's more, a more speculative bubble can be seen in the bond market than in US equities. It seems that there may even be a phenomenon in which central banks stop the further process of monetary easing, because the situation in the economies will eventually start to improve, which may force investors to sell inflated bonds and this capital will be able to be transferred to the stock market in the US or Europe, and maybe only such a process will cause the emergence of the last phase of stocks increases, and then we may deal with the speculative bubble on indices.
Currently, the prospects for improvement in US-China relations, the lack of a negative impact of the trade war on company results and, as yet, a no hard Brexit, are factors that could positively affect the stock market.
Europe may also be close to the end of the current economic slowdown, which with current monetary policy and negative bond yields may have a positive impact on stock indices. We are observing this, even by increasing the DAX index (DE30 on the Conotoxia platform) to the highest level since February 2018.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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