Bitcoin is a bubble no arguments about that, says Societe Generale's famously bearish global strategist, Albert Edwards. The trouble is, the cryptocurrency is also distracting us from a far more important bubble that in US stocks. Indeed, Edwards notes that "amid all the focus on the parabolic rise of bitcoin it has gone almost unnoticed that, following its rapid ascent", the S&P 500 index is more overbought than at any time since 1995. Meanwhile, professional advisers are more bullish on the market than at any time "since (just before) the 1987 crash".
The overvaluation could, of course, continue "the market can remain expensive and irrational far longer than most investors can stay solvent, or indeed longer than most investment managers can retain their jobs in the face of underperformance".
But there's another warning sign to monitor. Investors are justifying their enthusiasm by hoping that Donald Trump's tax-cut package will help to boost corporate profits. However, says Edwards, if you look at profits as reported in the national accounts (rather than in individual companies' accounts), then "the underlying profits recovery looks increasingly fragile... looking at only domestic, non-financial firms ie, those selling in the US profits have barely rebounded on an economic basis".
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In other words, the apparent recovery has been driven mainly by firms with high exposure to global growth, rather than those that generate most of their sales inside the US. Indeed, if you strip out the energy sector, which has benefited from the rebound in oil prices, profits growth is slowing down. "In an overvalued, overbullish and overbought market, this profits deceleration might yet prove to be highly significant."
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