Are We in a Bubble?

The current P/E ratio for the S&P 500 is around 25, which is certainly historically high, meaning stocks have a lot optimism baked into their prices. The bull case appears to be a combination of AI, solid economic growth, plus moderating inflation, meaning likely Fed rate cuts later this year.

?On the other hand, no one saw the Great Recession of 2008-09 coming, or Covid, or the late 2022-early 2023 surge in inflation which led to multiple rate hikes and kneecapped stock and bond prices (plus made everyone who bought a home in the last 15 years determined to never move and lose their three-percent mortgage).

?So even if stocks aren’t trading at crazy valuations, and the economic outlook seems encouraging, no one, certainly not me, has a clue whether they’ll continue to climb higher. ?

?But consider what an over-hyped market really looks like: In March of 2000, right before the dotcom bubble popped, the P/E ratio for the Nasdaq was 200, although that was somewhat of an artificial number, because a lot of unprofitable companies had pulled off successful IPOs. So the aggregate earnings of the Nasdaq included a many listed stocks still generating sizable losses. But the S&P 500, which consists of a more balanced cross-section of mature companies and industries, peaked at 45 times, or almost double current levels.

?Buy-the-bubble late nineties favorite Cisco traded at a peak P/E multiple of 196 and Oracle at 148.

?Yes, Nvidia’s current P/E multiple of 77 certainly appears bubble-adjacent. Same with Amazon at 60, although their forward P/E is 41, based on rosy analyst estimates, so on the sane side of the rational/lunatic dividing line, plus the Seattle based e-commerce-and-everything-else giant has a long history of being overvalued. But other tech leaders seem more tethered to historical valuation metrics. Apple trades at 27 times; Google, 25; Meta, 33; Microsoft 38.

?Even Oracle, still a tech powerhouse and whose stock is up 140 percent over the past five years, sports a P/E multiple of 35. Bullish sentiment behind the price, certainly. Mass delusional thinking. Not yet.

?Like Rene Magritte’s famous Surrealist painting, (the French translates to ‘this is not a pipe”), this post is certainly not a prediction about the future direction of the stock market.

?But at least the top tech companies are making money hand over fist, in sharp contrast to the dotcom era, when questioning why unprofitable companies had high valuations meant “you don’t get it.” Like their subsequent gimmicky brethren, meme stocks and SPACs, hang on to your wallet when someone tells your earnings don’t matter.

?Stocks, in the long-term have always been weighing machines. AI hasn’t changed that fundamental proposition.

?Still, it’s intriguing to wonder if the current extra dose of optimism is deserved. We’ll know for sure in a few years. Until then, as always, the crystal ball is cloudy. Ask again later.

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