IS THE RATING OF THE US STOCK MARKET SUSTAINABLE?

[04.08.21] The simplest measure of stock market valuation is the ratio of price to profits. Currently the US market trades on roughly 22 times profits compared to a historical median of around 15 times. Is this sustainable?

One explanation for the sharp increase in the valuation attached to the US stock market is that it has some of the best large capitalization Tech businesses on the planet. These businesses have dominant positions in their markets and can be expected to benefit from the continued digitisation of the global economy for many years to come.  For the market to attach very high valuations to these businesses seems reasonable.

However, if we exclude these businesses from the US stock market it is still very highly valued. Excluding Big Tech the market still trades on 19 times profits. This is approximately a 20 percent premium to the historical median valuation.

So, the US stock market exhibits high valuations across the board. In general, we would attribute this to aggressive money printing, to the tune of USD 120 bn per month, by the US central bank. At a more specific level there has been belligerent buying by retail investors. The share of US household wealth invested in equities has risen to 49%. This is the second highest allocation in recent history, only surpassed by the period around the dotcom era in 2000.

We think that a slowdown in the growth of Big Tech profits and a reduction in the amount of money the US central bank injects into the economy each month is likely to trigger a correction in the US market in the coming months. Consequently we have a preference for a lower allocation to the US market and higher allocations to Asia and the UK.

Categorised in: Uncategorised

This post was written by Robin