Stocktake: No bubble, but stocks are getting overheated

Goldman Sachs says stocks aren’t in a bubble. Great, but that doesn’t mean investors don’t have cause for concern.

In a recent note, Goldman detailed nine factors commonly seen in past bubbles such as the Dutch tulip mania in the 1630s, the 1929 stock market and the 1990s technology bubble. These factors include excessive price gains and extreme valuations, the justification of new valuation approaches, increased market concentration, frantic speculation and investor flows, easy credit and rising leverage, among others.

Some such characteristics are evident today, including “pockets of excessive valuations”, although Goldman’s overall take is that the current risk of a bubble is relatively low.

Saying stocks are in a bubble doesn’t mean everything is hunky dory, however. A separate JPMorgan report looks at nine valuation metrics and finds stocks look very expensive relative to history on all but one. The median metric suggests the United States market is more expensive than it has been 95 per cent of that time.

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Sentiment, too, looks problematic. Retail investor surveys show sentiment is more optimistic than 98 per cent of readings since 2016. The corresponding sentiment numbers for fund managers and investment newsletter writers are 99 and 95 per cent, respectively.

This bullishness is reflected in weekly investor fund flows, which recently hit their highest level since 2003, according to Deutsche Bank data.

We may not be in a market bubble, but things are heating up.