Amid a robust dollar, a weak euro, cheap crude oil and shifts in consumer spending, stock valuations are swelling and forming a bubble.
That’s according to a monthly survey of investors conducted by Bank of America Merrill Lynch where respondents said there is “growing overvaluations” in the equity market and the bond market as well.
The global investors who were polled said there is a “bubble forming” in the market. The survey noted that the “proportion of global investors saying equity markets are overvalued has reached its highest level since 2000.” Twenty-five percent of respondents said global equities are “currently overvalued,” which is up from 23 percent in the same survey for March. In February, that number was eight percent.
“At the same time, the proportion of respondents saying that bond markets are overvalued has reached a new high in the survey’s history,” the reported noted. “A net 84 percent of the global panel says that bonds are overvalued, up from a net 75 percent in March.”
By region, the U.S. ranked as the most overvalued market while Japan and Europe remain undervalued. Michael Hartnett, chief investment strategist at Bank of American Merrill Lynch Research said in a statement that he is “seeing a form of rational exuberance in Europe where a positive view on stocks is supported by fundamentals — but investors no longer believe valuations are cheap.”
However, not all market sectors are overpriced. In separate research by New York University’s Stern School of Business on the price-to-earnings ratios of all market sectors, the retail and apparel segments are poised to maintain valuations that are close to where they are currently — and in many cases below their historical levels.
A price-to-earnings (P/E) ratio is a measure of the current stock price to the current or forecasted earnings. A forward (or future) ratio of 20, for example, means that investors are willing to dole out $20 for $1 worth of stock. Typically, investors and analysts like to see ratios of between 20 and 25 percent. Ratios, however, vary between industries and are often used to gauge individual stocks.
In the NYU research, the apparel sector has a forward P/E of 23.93, which compares to its trailing (or historical) P/E of 27.82. General retail and specialty retail have forward P/Es of 22.96 and 20.67 percent, respectively, which are significantly below their current and trailing ratios. And the apparel and retail ratios are low relative to other sectors such as oil and gas distribution, which has a forward P/E of 113.53, or real estate development’s 147.18 percent.
The decline in forward P/E for retail and apparel reflects stability in a market with sectors that have been volatile and overheated in regard to stock prices as investors have sought out growth over other investment outcomes. But that may be changing.
The Bank of America Merrill Lynch survey revealed a shift in investment models. The global investors polled “have indicated that they will start prioritizing value over growth investing. The survey shows a spike in the proportion of panelists predicting that ‘value will outperform ‘growth’ in the coming year — up to a net 25 percent from a net 6 percent in March.”