Stock markets around the world are experiencing unprecedented growth, with indices in the US, Europe, Japan and India repeatedly breaking records. The S&P 500 in the US, for example, has risen by about 60% since its 2022 low.
However, despite this great performance, there are factors that threaten to derail the bull market and herald the emergence of a bubble, as highlighted in a recent article in The Economist.
Amazing market growth
The magazine notes that the global stock market boom has been driven by a combination of factors. Historically, stocks have delivered consistent returns, with global stocks delivering an annual real return of 5.1% since 1900, and US stocks delivering a real return of 6.5%. This trend has been driven by strong performance across sectors and regions, with the exception of the slump in Chinese markets.
Torsten Slok, chief economist at Apollo Global Management, told the magazine he was concerned about the current market activity, saying, “A lot of people I talk to are very concerned. The bubble is getting bigger and bigger. At this point you have to worry that everyone is going to run for the exits at the same time.”
Rising Ratings and Potential Risks
Valuations are at alarmingly high levels, with the S&P 500’s market value up nearly 80% since early 2020. The current price-to-cyclically adjusted earnings (CAPE) ratio, a measure of companies’ long-term financial performance, is at 36, a level seen only during the worst of the dot-com bubble and in 2021 with the peak of Covid-19, both of which were followed by collapses.
This high valuation has made investors nervous, as the real yield index is approaching its lowest levels on record, according to the Economist.
Goldman Sachs strategists recently issued a warning about the potential for a correction, noting that stock prices have risen relative to bonds even as the risk of financial shocks has increased. Mike Wilson, Morgan Stanley’s chief investment officer, also predicted a 10% correction before the next U.S. election, the magazine reported.
Economic and geopolitical factors
This market weakness is exacerbated by a number of economic and geopolitical factors, the magazine noted. The global economic landscape remains risky, with potential downturn triggers including unexpected interest rate hikes, disappointing corporate earnings, and geopolitical conflicts.
The Fed’s recent tightening campaign has led to a cautious outlook among investors, who now fear the possibility of another rate hike, according to the Economist.
Moreover, geopolitical tensions across the world are adding to the uncertainty. While these risks are difficult to hedge against, they can have significant implications for global markets.
In addition to market concerns, trade disruptions have further complicated the economic outlook. For example, Turkey recently halted all imports and exports to Israel, following the war in Gaza.
