Two charts to focus on here, underlining the point that just because a market goes up a lot doesn’t mean it is overvalued.
First chart shows the forward price to earnings of the SP500.
It is unchanged through the last 5 years.
2021 had a hiccup since we had the old pandemic and rate hike expectations fed through to 2022.
I would expect we do not have a pandemic again.
But couple this with the next chart and we can see something pretty stark…
Compared to the DotCom, we are no where near the size of tech debt growth across any quality of debt.
This is important.
The firms now are revenue generating outside of the AI boom.
Back during DotCom, they were new entrants who were looking to feed off the excitement of the internet.
People might bring in a contestation with another indicator here, which is the Buffett Indicator (size of the stock market relative to GDP).
Yes, it is high.
But the issue with this indicator is that the US dominates in EVERY world ETF.
This means the concentration of investment globally is centred on US companies.
Before the concentration was far less. You’d have more exposure in passive ETFs to your domestic companies.
Or, you’d simply invest more domestically since the passive ETF complex wasn’t as it is today.
This capital flow is what makes the Buffett Indicator a little weak these days in my eyes, and doesn’t provide the adequate historical context to match what is happening today with past periods.
If US companies are returning the most cash to shareholders due to innovation and net margins (earnings) then it makes sense for investors to focus on the US and no where else!
What do you think? Hit reply and let me know your thoughts.
David.