Have stocks become too expensive?

The MSCI World index has just recorded its longest bullish series since 2009. But its valuation is also the highest since that same year.

Where will stock market prices stop? Since the beginning of February, the shares have not stopped climbing, supported by thehope for a return to normal thanks to vaccines and by economic stimulus plans announced in the United States and Europe.

The index MSCI World, representative of the trend in the equity markets of the world’s main financial centers, has just continued eleven increases in a row, which had not happened since July 2009. If the uptrend is confirmed on Tuesday, it will display twelve consecutive progressions, unheard of since the end of 2003.

High valuations

But, warns the Bloomberg agency, this surge also coincides with a sharp rise in the valuation of shares. The MSCI World price / earnings ratio has returned to 35, a level that had not been observed since the end of 2009. Global equities are therefore traded at prices that represent thirty-five times the expected earnings in the coming year.


MSCI World price / earnings ratio

Global stocks in the MSCI World Index are priced at thirty-five times their expected earnings during the year.

However, it is possible that earnings expectations be revised upwards in the coming months, given economic developments, which would bring valuations back to more reasonable levels.

Waiting, optimism is also confirmed on the bond market, where interest rates tend to tighten, a sign that investors are willing to take more risk and are moving away from fixed income securities. This phenomenon, which started in the United States, is now also seen in Europe.

Professionals very confident in the economic recovery

Now is also the time for the exuberant optimist on the side of the portfolio managers. According to the latest Bank of America survey, conducted between February 5 and 11 among 225 institutional investors, 91% of respondents believe the economic situation will improve. Never seen since that monthly survey – one of the most followed on Wall Street – launched in 1998.

“The only reason to be pessimistic is… there is no reason to be pessimistic.”

Michael Hartnett

Chief investment strategist chez Bank of America

“The only reason to be pessimistic is … there is no reason to be pessimistic,” worries Michael Hartnett, chief investment strategist at Bank of America. He thus observes that more and more professionals are once again banking on a V-shaped recovery (34% in February against 10% in July). And 84% of them predict an improvement in profits in the next twelve months.

This translates to a 180% change in cash flow expectations. For the first time since January 2020, investors want investment managers of listed companies to put more emphasis on increasing spending (“capex”) rather than improving their balance sheet.

What bubble?

This extreme confidence in the economic recovery is also encouraging professionals to invest more. The stock market saga between Reddit-traders and hedge funds obviously had no impact. A record number of managers surveyed admit to taking more risk than normal. And only 13% of managers surveyed believe that a speculative bubble is forming on Wall Street.


Only 13% of managers surveyed believe that a speculative bubble is forming on Wall Street. 53% of them believe rather that we are at the end of a “bull market”.

From now on, cash represents on average only 3.8% of their portfolio. Making it an important sell signal.

The majority of institutional investors (51%) believe that emerging markets will outperform this year, against 17% for oil and 14% for the S&P 500. At the sector level, technology remains the big favorite, ahead of health and raw materials.

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