Stock markets are grossly overvalued, but Trump’s not going to burst the bubble in an election year

The data is in and stock markets across the US, Europe and Asia have price-to-earnings ratios well above their 15-year averages

But with accommodative monetary policy entrenched, and Trump sure to keep up pressure on the Fed in an election year, expect easy credit to continue to push markets to morbid heights, for now

Reading Time:3 minutes

Traders share a light moment on the floor at the opening bell of the New York Stock Exchange on January 2, 2020. It looks like stock prices and credit creation are set to go even further off the charts – before the inevitable day of reckoning. Photo: EPA-EFE

Published: 1:00am, 27 Jan 2020Updated: 1:00am, 27 Jan 2020

Now it’s “official” – most of the world’s leading stock markets are overvalued by the standards of the past 15 years. This applies to Wall Street especially, but also to some markets in Europe and Asia (India and Thailand in particular, but also China and others).

This finding by the Institute of International Finance might appear to signal that the party is over for stock markets. The International Monetary Fund has, however, confirmed that central bank monetary easing is back on track, and that is likely to refill the punchbowl.

It was clear, even to anyone with only half an eye on it, that stock markets were getting ahead of themselves last year despite US President Donald Trump’s trade wars and slowing economic growth. But analysis by the Washington-based IIF (an association of the world’s leading financial institutions) confirms this fact.

As the IIF notes: “Equity prices relative to forward earnings are well above their long-term averages in many cases”. In the US, the price-to-earnings ratio (at around 20) is above the 15-year average of 16, with a strong surge in 2019 alone. Only India beats that, with a dramatic profit surge to 23 times earnings.

Thai stocks are the third most overvalued by this measure. Euro-zone stock valuations are also stretched compared to long-term averages, as are those in Britain. Indonesian, Malaysian and Philippine stocks are also relative pricey, with only Japanese (and Turkish) stocks looking undervalued.

As might be expected, the IIF data shows that tech stocks have outstripped the rest of the field and stand about a third ahead of their 15-year average, after surging even more dramatically last year. Banks and other financial stocks, on the other hand, are languishing below their averages.

Select Voice

Choose your listening speed

Get through articles 2x faster

1.25x

250 WPM

Slow

Average

Fast

00:0000:00

1.25x