“Stock prices are in a bubble of epic proportions. Risk of a major collapse remains elevated.”

Financial markets commentator and analyst Colin Twiggs wrote the above in one of his popular e-newsletters on January 23 about the S&P 500 index in the US.

“S&P 500 valuations are higher than the 1929 (Black Friday) Wall Street crash and the October 1987 (Black Monday) crash. The Dotcom bubble is the only time in the last 120 years that the ratio between Price and highest trailing earnings (PEmax) was higher,” the Queensland-based Twiggs wrote.

When his e-newsletter hit subscribers’ inboxes the index stood at 3841 (Friday, January 22) and it has since continued to climb, closing at 3932 on February 16.

Concerns rising

Twiggs is not the only commentator to issue an alert over US stock valuations.

On FinancialStandard.com.au, Benjamin Ong wrote that “euphoria” over declining global covid deaths, vaccine rollouts, strong economic activity, low interest rates and stimulus packages had pushed the US equity market to overvalued levels.

“The S&P 500’s P/E ratio currently stands at 22.5 times earnings which is way past its periodic averages – five-year (17.9 times); 10-year (15.9 times); 15-year (15.2 times); long-term (14.4 times).

“A little bit more and the S&P 500 P/E ratio would hit the peak overvaluation of 23.4 times recorded on the 1st of September 2000 in the midst of the dotcom bubble,” Ong wrote on February 17.

‘Underlying issues’

Quoted on Forbes.com on February 12, US financial advisor Jim Stack said: “The parallels we have today are historically very, very concerning.

“The current froth is the icing on the cake, and when you look through it, you see a lot of other underlying issues.

“Valuations on Wall Street are in the stratosphere,” said the money manager and financial researcher.

US hedge fund manager Mark Yusko told CNN Business on February 8 that he thought the US was in a bubble like 2000.

“That doesn’t mean that tomorrow the market is going to crash.

“The challenge with extreme valuations is they can go on longer than you think,” Yusko said.

Or is it a bubble?

Not every observer, however, is convinced there’s a bubble or, at least, widespread extreme overvaluation.

Investment researcher David Trainer, quoted on EconomicTimes.com on February 12, said the market was fairly valued.

“I don’t see the overall market as horribly overvalued. There are pockets of stocks, we call them micro bubbles, that are extremely overvalued,” Trainer said.

Earnings OK

Investor and economist Hugh Johnson told Yahoo Finance that one of the reasons the US was not in a bubble was that investors were merely optimistic rather than euphoric.

“Optimism has increased, but it certainly is not what I would call exuberant and it certainly hasn’t gotten to the point where we would call it euphoria, which is characteristic of a bubble.”

He also said that based on this year’s estimated earnings the S&P 500 had a price-to-earnings ratio of 22 against the average over the past 30 years of around 20, which indicated the index was only somewhat overvalued.