US stocks are obviously in a bubble. But is it a rational bubble?

Everyone wants to know if the US stockmarket is in a bubble. But that is the wrong question, says Merryn Somerset Webb. Of course it’s a bubble. The real question is: is it a rational one?

Bubble and pin
Bubble bubble - toil and trouble?
(Image credit: © Getty Images/iStockphoto)

Is the US stockmarket a bubble? That’s the question everyone wants answered right now. It is the wrong question. Of course it’s a bubble. Choose any valuation metric you like in the US and it will tell you so. Yardeni Research puts the ratio of S&P 500 total market capitalisation to S&P 500 forward sales (an adapted version of the “Warren Buffett indicator”) at a record 2.54 times at the end of December, versus 1.88 at the beginning of 2000. A bubble. A full 53% of S&P stocks had forward price/earnings ratios of over 20 times in the first week of January – it was a little higher in June last year, but that aside is the highest since the series began in 2006. Bubble.

The percentage of stocks in the US trading above the 200-day moving average is at a ten-year high. Within almost all sectors, more than 90% of stocks are trading above their 200-day moving averages (notable exceptions, says Variant Perception, include biotech, junior gold miners, utilities and energy). Bubble. All technical indicators show what Variant describes as “extreme overbought market conditions” and 89% of respondents to a Goldman Sachs survey said they expect stocks to rise this year. Bubble.

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Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.