Newspaper article The Journal (Newcastle, England)

Should We Still Be Wary of Bursting Stock Market Bubble? SHARE WATCH

Newspaper article The Journal (Newcastle, England)

Should We Still Be Wary of Bursting Stock Market Bubble? SHARE WATCH

Article excerpt

Byline: Andrew Miller

STILL not time to 'sell high'? Many market commentators still worry about a stock market bubble. Compared to their lows in February, current market levels indeed seem impressive.

Based on MSCI indices, emerging markets are the best performing region, up more than 29% in US dollar terms, whilst developed markets have risen over 17%.

Earnings expectations on the other hand are still being revised downwards, adding to the perception of equities' expensiveness. The US stock market, where the 12-month forward price to earnings (PE) ratio is the highest of all developed market regions and is now nearly two standard deviations above its historic 10-year average is at the centre of the pundits' concerns.

Is it time to invoke the famous 'buy low, sell high' investment strategy? The last 10 years may provide a misleading yardstick for evaluating current market levels - the last 10 years are of course skewed by an abnormally severe financial crisis.

On a year-on-year basis, recent S&P 500 returns have been below 5%, only just high enough to quieten the concerns of those that see this measure as an indicator for pending US recessions. Similarly, when comparing the S&P 500's PE ratio to its long-term history in terms of standard deviations from its median, US equities do not look to be overvalued.

The superior performance of the US stock market (up 9.0% annually since inception of the MSCI indices in 1970 compared to 8.6% for the MSCI World index) continues to be well supported by fundamentals.

The trajectory of the S&P 500 price index is in line with overall US corporate profits.

Whilst the Q2 US reporting season is not yet finished, analysts expect that, after a six quarter long earnings recession, real earnings may finally have started to increase again on a year-on-year basis. The positive trajectory of the US ISM manufacturing survey supports this view.

Earnings expectations are now merely depressed in the short term, whilst the longer-term view has brightened decisively.

The S&P 500 forward PEG ratio (forward price/earnings to longterm growth) as a valuation metric for determining the relative trade-off between the price of stocks, the earnings generated per share and the companies' expected growth does not look stretched any longer. …

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