Cue the cries that the stock market is smack in the middle of a dot-com-like bubble that will end badly soon.
The news: The closely watched Shiller PE (price-to-earnings ratio) is now less than 5% away from eclipsing the level reached during the dot-com bubble, which would give the stock market its most expensive valuation in history.
The Shiller PE ratio is popular because it smooths out short-term earnings volatility and business cycle swings by using a 10-year inflation-adjusted average. In turn, this gives investors a clearer long-term view of whether the market is truly expensive or cheap compared to traditional single-year PE ratios.
The analysis: The markets are in full-on melt-up mode in May, with the Nasdaq Composite (^IXIC) up 8% and the S&P 500 (^GSPC) gaining 5%. A mixture of a strong earnings season, a slight deescalation in the Iran conflict, and robust AI infrastructure investment has powered sentiment.
“Sometimes things defy logic and reason. So yes, when you think about it, the stock market is supposed to be a forward indicator. So obviously people are thinking that the war will be over at some point in the reasonable future,” Carlyle billionaire co-founder David Rubenstein told Yahoo Finance (video above).
Read more: How to protect your portfolio from an AI bubble
Bottom line: We know the great artificial intelligence infrastructure build-out is driving economic growth in the US. We generally know AI chip giant Nvidia (NVDA) will report strong earnings next week.
What we don’t know — and this is a wildcard markets may be underpricing — is how new Fed Chair Kevin Warsh will respond to accelerating inflation in the country.
If there is anything that could lead to a steam blow off in markets soon, it’s a more hawkish-than-expected Warsh right out of the gate.
“Inflation is a problem going forward that could become a problem for the entirety of the market,” Northwestern Mutual chief investment officer Brent Schutte said on Yahoo Finance’s Opening Bid.
Brian Sozzi is Yahoo Finance’s Executive Editor and a member of Yahoo Finance’s editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.
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