Yesterday, tech stocks dropped almost 3% and the route appears to be continuing today. Are we flirting with the beginning of a painful correction?
Frequently, we have discussed how the Magnificent Seven has really been driving the S&P 500 to new heights, and yet many pundits, including Goldman Sachs’ top analysts are warning us of an AI/tech bubble. One thing that a lot of pundits feel is weighing on markets and the ability of markets to go ever higher is what’s called the “Trump Trade”. We have mentioned many times that historically elections don’t matter, but the markets are beginning to price in the assumption that Trump is going to win the election this year.
Another item I’d like to talk about is stock valuations. Stocks have gone up since 2022 by an astonishing 70%. The market is up 28 of the last 37 weeks. It’s the best run we’ve seen in three decades. Arguably, one of the best measurements of stock market valuation is the Cyclically Adjusted Price Earnings ratio, and today it’s at 36. It’s only ever been higher just preceding a major market correction.
Another measure is what we call the earnings yield of stocks. The earnings yield of the market today is actually only slightly higher than the interest available on Treasury bonds. That is a red flag indication that stocks are significantly overvalued relative to long-term valuations. Now, it is a fool’s errand to try to time the markets. Markets can be overvalued for extensive periods of time. But certainly, this is not a time to be chasing returns. It is not a time to be increasing exposure to the stock market because of FOMO, fear of missing out of market returns. If you have any questions about this or any other topics, please do reach out and give me a call. We wish you the best of investing success. Thank you.
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