The tech-led bubble is set to burst, despite Janet Yellen’s optimism about financial stability

While financial markets continue to hit record highs, we need to ask whether they are simply overvalued or already in bubble territory.

Almost all equity and bond markets are up. And with US Federal Reserve chair Janet Yellen only talking about financial stability, rather than signalling the direction of interest rates, financial markets seem to be fearless, waiting for traders to return from their summer holidays to begin another bull run. Broadly, the MSCI advanced market index is up 10.9 per cent since the beginning of the year in dollar terms, the emerging market MSCI index is up 24.7 per cent, and the world bond market index is up 7.4 per cent. According to Goldman Sachs, the total real return for the S&P 500 for 2009-17 is the second greatest post-war bull run after 1990-2000.

A lot of the optimism in the stock market has been in technology stocks, with the NASDAQ Composite Index up 16.6 per cent so far this year. Corporate profits in the US and China are also recovering somewhat, which seems to justify higher valuations, while Europe is bottoming out and recovering. But it can also be argued that the recovery in corporate profits is due to exceptionally low interest rates, that cannot be sustained if central banks begin to normalise their balance sheets.