Stocktake: Reasons not to be cheerful about stocks

One strategist says he has never seen market so highly valued in a time of such uncertainty

One strategist who clearly doesn't think stocks should be at all-time highs right now is GMO's James Montier, as evidenced by the title of his latest white paper, "Reasons (NOT) to be cheerful".

A long-term US market bear, Montier says he has “never seen a market so highly valued in the face of overwhelming uncertainty”. It’s not that he is pessimistic as to what’s next – Montier says he has no idea if there will be a strong economic recovery or a second wave of Covid-19. The problem is there is no “wriggle room” if things go wrong, no “margin of safety” priced into US stocks. US markets, he says, have priced in a “truly Panglossian future where everything is for the best in the best of all possible worlds”.

Montier is always worth reading, but he may be over-egging things here. Investors are not indiscriminately buying US assets – many US banks, tourism companies and retailers have endured a torrid 2020. Only about a third of S&P 500 companies are above pre-pandemic levels and the average US stock has fallen in 2020.

US stocks look expensive relative to non-US markets, but that's largely accounted for by the high valuation afforded to the high-margin technology sector. Five technology companies – Apple, Amazon, Microsoft, Alphabet (Google) and Facebook – account for almost a quarter of the S&P 500's total market capitalisation. In contrast, tech companies account for a fraction of the European equity market. This sectoral composition explains much of the US-Europe valuation gulf.


You can argue US tech giants are overpriced, but does that support Montier’s conclusion that investors have “forgotten about risk” and that the US market “appears to be absurd”? No.