After a surprisingly robust performance this year, U.S. stocks are showing signs of potential danger, with valuation indicators flashing red amidst a deepening bond market rout and the Federal Reserve’s unwavering stance on higher-for-longer rates.
As per an analysis by Business Insider, the S&P 500 index has pared its year-to-date gains, and stock valuations appear increasingly stretched.
Notably, the relative valuation of stocks versus the debt market indicates risk. In August, the S&P 500 reached levels relative to the US corporate bond market unseen since the peak of the dot-com boom, as per data from global analytics platform Koyfin.
Such a surge was last witnessed in spring 2000, followed by a multi-year meltdown that saw the S&P 500 crash 50% between March 2000 and October 2002.
The equity risk premium, another indicator showing the relative expense of stocks to debt, has dropped to lows unseen in decades, reflecting the inflated stock valuations.
“Equity risk premium is near its worst ever level going back to 1927,” research firm MacroEdge stated.
Pictet Asset Management chief strategist Luca Paolini and billionaire investor Jeffrey Gundlach, CEO of DoubleLine Capital, have echoed similar concerns about the overvaluation of the market.
Gundlach warned last month that a recession may hit the U.S. economy within the next three quarters, stating, “It’s hard to love equities when the risk premium is the lowest in 17 years, by a lot.”
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