Eleven years into this bull market, it’s déjà vu all over again. It is starting to feel like we are back in the bubble conditions of the 1990’s, or at least getting there. It is not so much the overall market that has me bothered. I am concerned about specific cases…a lot of specific cases. A slightly alarming number of stocks have come uncoupled from economic reality.
Let me start on a fairly positive note by saying that in the context of prevailing interest rates, overall stock valuations are not crazy—not in most cases anyway. In a world of ultra-low interest rates, it makes sense that stock valuations are levitating above historical averages. According to data from Finviz.com, for the 62 U.S. companies with market capitalizations over $100 billion, the median trailing P/E is 27. This equates to a median “earnings yield” of 3.7%, meaning $100 invested in large stocks is earning $3.70 in corporate profits. That is low by historical standards (valuations are high), but it looks okay compared to 10-year Treasuries yielding 1.4%. It is possible that the market continues to trade at roughly this same valuation for a long time, advancing at the rate that corporate earnings grow. The stock market is one of two places where things can go up without coming back down.
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