Earlier this week, an economist at the University of Helsinki predicted that the U.S. economy would enter a recession by 2027. As reported by Business Insider, the professor, an expert in financial crises, named high corporate debt as the trigger for a collapse in the economy. The result would be a global financial crisis, which would cause a U.S. stock market crash.
Personally, I don’t put a lot of faith in theories of this kind. There are simply too many moving parts in the economy to pinpoint a date and cause for a stock market crash.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
Even so, I can understand the underlying anxiety. There have been several warning signs lately that the S&P 500 (SNPINDEX: ^GSPC) is expensive and approaching a correction or crash. I wouldn’t go so far as to put a date or year on it, but it seems likely a bear market is on the way. Here’s what we know.
The stock market looks strongly overvalued by two popular measures
The current bull market is a bit of a freak. Against all odds — stubbornly high inflation, negative consumer sentiment, general apprehension and market skepticism — the S&P 500 has notched three straight years of double-digit gains, with a fourth underway. Most bull markets last on average 2.7 years. This one has lasted nearly four.
Another unusual feature of this bull market is its heavy concentration. For a long time, the index was driven by only a handful of megacap stocks, most notably the “Magnificent Seven” — the nickname Bank of America Chief Investment Strategist Michael Hartnett gave to seven dominant tech stocks. While lately the market has broadened, with energy, industrials, and healthcare contributing more, these market leaders were responsible for much of the S&P 500’s rise.
Those enormous gains have started showing up in another concerning way: valuation. By one measure, we have entered the second most expensive market in history, behind only the dot-com era. The CAPE ratio, which compares the S&P 500’s price today to the last decade of earnings, sits around 41. That’s more than twice its long-term average of about 17, and only a few points shy of its all-time high of roughly 44.
The Buffett indicator is flashing a similar warning. This metric, created by famed investor Warren Buffett, compares the total value of the stock market with GDP. The idea is that if the stock market is growing faster than the economy, a bubble might be forming. Any reading above 120% signals that the market is overvalued, with 200%-plus so hot it’s “playing with fire.” The current ratio is 244%.
