Is A Bubble Forming In U.S. Equities?

According to our U.S. Investment Strategy service, bubble concerns are premature.

Bubble in US Equities

Today’s valuations do not resemble the excesses that were inescapably apparent in the 1999-2000 equity bubble. Back then, large-cap tech stocks, achieved valuations that dwarfed disregarded old-economy small-caps. Even old-economy mega-caps went along for the ride, trading at levels that hobbled their performance for several years afterwards.

Equities are surely somewhat frothy and consumer tech businesses (with dubious long-run profitability outlooks) are commanding stupendous valuations, but today’s landscape does not compare to 1999. There are always story stocks that capture the market’s imagination and trade at triple-digit multiples, but the S&P 500 as a whole is trading at 15.6 times calendar year 2014 earnings – 62% of its December 31, 1999 multiple, or 60% below its peak.

The bottom line is that although vigilance is warranted (indeed, a correction may be in the offing), there is room for the bull market to run.

What To Do With Chinese Stocks?

The shift in policy stance should help the economy and the Chinese stock market to stabilize.

What To Do With Chinese Stocks

Chinese stocks, both in the domestic and the investable markets, have remained stuck in a broad trading range that has been in place since 2012. The two indexes have become increasingly correlated, and both have failed several attempts to break out, but it is encouraging that the markets have always been able to find strong support at the bottom end of the trading range, despite mounting macro concerns.

The trading pattern of Chinese stocks appears consistent with the broad macro situation: the upside in growth is capped by the authorities’ credit tightening efforts, and the downside is limited by some mini stimulus programs to prevent a deflationary downward spiral. In this vein, we expect the shift in policy stance should help both the economy and stock prices.

Structurally, our China Investment Strategy service maintains the view that Chinese equities have been dramatically de-rated in the past several years, and the current valuation level has largely reflected deep macro concerns among investors. But the reform programs announced late last year will help the economy’s long term outlook and increase the structural appeal of Chinese equities.