Investors

little room for error and mean stocks may not be worth their price tags. Such worries got some validation in recent weeks after stocks with some of the highest valuations — technology stocks — slumped sharply for no clear reason.

Global fund managers rank another tech bubble as the No. 2 risk that could swamp investments, just after a second wave of coronavirus infections, according to the most recent monthly survey by Bank of America Global Research.

The argument for being OK with high valuations is more nuanced. Stocks have climbed this high on expectations that profits and the economy will resume growing after a vaccine for the new coronavirus hits the market. That may come as early as the first three months of 2021, according to many investors.

Also, interest rates have almost never been this low before. The Federal Reserve has said it will keep short-term rates pinned at nearly zero for a while to help the economy recover, and it may even wait to raise rates until after inflation rises above its target level. On Wednesday, it voted again not to touch short-term rates.

Lower interest rates generally mean higher valuations for stocks. For one, it means bonds are paying less in interest, which makes them relatively less appealing than stocks. It also means the future cash flows that companies are expected to generate are worth more in today’s dollars than they would have been if interest rates were higher.

That’s part of the reason why Goldman Sachs strategists say the S&P 500 could end the year at 3,600, a nearly 6% rise from Tuesday’s close, although they acknowledge today’s valuations are already high.