Wall Street’s record run sets alarm bells ring­ing

An­a­lysts warn in­vestors that US stocks can­not con­tinue to ‘defy eco­nomic grav­ity in­def­i­nitely’

The Daily Telegraph - Business - - Front Page - By Tom Rees

THE US stock mar­ket is at its most over­val­ued ever on some closely watched mea­sures as Wall Street con­tin­ues to rise de­spite the global down­turn.

The av­er­age S&P 500 stock is trad­ing at record high val­u­a­tions fac­tor­ing in prof­its, sur­pass­ing lev­els seen dur­ing the dot­com bub­ble on some mea­sures, ac­cord­ing to Bank of Amer­ica.

In­vestors warned that US stocks “can­not defy eco­nomic grav­ity in­def­i­nitely” af­ter the wave of cen­tral bank stim­u­lus trig­gered a re­mark­able turn­around on mar­kets.

The Wall Street bank found that the S&P 500 is well above av­er­age lev­els on the vast ma­jor­ity of in­di­ca­tors watched by in­vestors.

While many mea­sures still put stock prices be­low the frothy val­u­a­tions reached dur­ing the dot­com bub­ble in the late Nineties and early 2000s, some have pushed past those lev­els to record highs.

“Stocks are trad­ing above av­er­age on all but two of the 18 mea­sures we track – most no­tably, the for­ward price/ earn­ings to growth is at record highs and the me­dian for­ward price to earn­ings is in line with the prior record,” said Savita Subra­ma­nian, Bank of Amer­ica strate­gist.

The S&P 500 has re­cov­ered all of its 2020 losses de­spite US GDP plung­ing 33pc on an an­nu­alised ba­sis in the se­cond quar­ter.

Since the low hit in March as US stocks fell into a bear mar­ket at a record pace, the in­dex has gained 44pc. In­dices in Europe have strug­gled to keep pace, with the FTSE 100 re­bound­ing 18pc. An­drew McCaf­fery, at Fi­delity

In­ter­na­tional, warned mar­kets “can­not defy eco­nomic grav­ity in­def­i­nitely”.

“As more bleak eco­nomic data emerges, we think mar­kets are near­ing their lim­its with­out fur­ther stim­u­lus and a much stronger re­cov­ery,” he said.

Mr McCaf­fery pre­dicted that stocks could be rocked by “re­newed volatil­ity” in the third quar­ter af­ter the re­cent surge.

Mar­ket watch­ers have ar­gued the re­mark­able rally has been driven by the huge sup­port pro­vided to the econ­omy by cen­tral banks as they have fired up the print­ing presses again to buy huge amounts of bonds un­der their quan­ti­ta­tive eas­ing pro­grammes.

Bank of Amer­ica es­ti­mates that global stim­u­lus by cen­tral banks and gov­ern­ments amounts to more than $20 tril­lion (£15 tril­lion), in­clud­ing $8.5 tril­lion of mon­e­tary sup­port.

Stock gains have stalled as the US Fed­eral Re­serve has slowed its pur­chases un­der the quan­ti­ta­tive eas­ing pro­gramme, noted an­a­lysts at Bar­clays. They added that more QE could be needed for stocks to ex­tend their re­bound.

Last week the Fed warned that the US re­cov­ery was fal­ter­ing as ris­ing in­fec­tions force states to re­verse re­open­ings and consumers turn cau­tious.

“We have seen some signs in re­cent weeks that the in­crease in virus cases and the re­newed mea­sures to con­trol it are start­ing to weigh on eco­nomic ac­tiv­ity,” said Jerome Pow­ell, the Fed­eral Re­serve chair­man.

He promised to do “what we can for as long as it takes to pro­vide some relief and sta­bil­ity”.

Wall Street stocks are trad­ing above av­er­age on all but two of the 18 mea­sures tracked by Bank of Amer­ica

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