Are US stocks too expensive?

Investors searching for a coherent economic policy in Donald Trump’s pronouncements “are about as likely to find enlightenment as soothsayers poking around in the entrails of a sacrificial goat”, says Ben Wright in The Telegraph. That hasn’t stopped US stocks from rallying since his election win. You might think the president-elect’s talk of tariff wars and mass deportations would be giving investors pause. Instead, they have been frenetically pulling funds from Europe and emerging markets and piling into Wall Street. Money managers seem to have concluded that Trump’s return means there is no alternative to US stocks.

Wall Street has been having a “phenomenal” year, with the S&P 500 up 27% and the Nasdaq 100 rising 29%, says the Novel Investor blog. The last two years have been unusually “calm”, with few big sell-offs. Just remember that such tranquil bull markets can induce complacency, encouraging investors to take on more risk than they would otherwise feel comfortable with. Markets are said to climb a “wall of worry”, meaning that though dogged by anxieties they nevertheless tend to rise, says Ben Carlson in his A Wealth of Common Sense blog. That was the case for much of this year, with robust gains despite weak measures of market sentiment. Yet since the US election, the mood seems to have shifted. “Animal spirits” have awakened and signs of froth are multiplying.

Are US stocks overhyped?

The S&P 500 has gained almost 57% since late 2022, says Matt Phillips for Sherwood News. That’s the best two-year run since the late 1990s tech bubble. That boom ended in tears, with the S&P selling off 50% peak to trough. Bulls argue that today’s tech giants are highly profitable and “nowhere near as overvalued as they were in the 1990s”. Perhaps, but at its peak, Microsoft’s 1990s’ valuation was “not dissimilar to Nvidia today”. That didn’t stop the shares from crashing 60%.

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US starting valuations are now so high that analysts forecast weak performance over the next decade, says James Mackintosh in The Wall Street Journal. Bank of America is predicting annual returns of 0%-1% for 10 years, a “catastrophic” showing. Bulls argue that the US stands to gain from artificial intelligence (AI), but there is still little evidence that the hundreds of billions of dollars that have been poured into the technology will generate a decent return. Another argument is that America is much more innovative than rivals elsewhere. But remember that in the 1980s everybody thought Japanese car and electronics firms were about to conquer the world. Corporate hubris often precedes a fall.

The US accounts for 27% of global GDP but 70% of all global stocks, says Ruchir Sharma in the Financial Times. “Investors are committing more capital to a single country than ever before in modern history.” The strengths of US corporations are real, but “one definition of a bubble is a good idea that has gone too far”. American shares are “over-owned, overvalued and overhyped”.

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