Wealth Management: Strategy blog - Are stocks in a bubble

Strategy team: Victor Balfour

After the fourth quarter's further gains, there are plenty of signs of US stock market froth: some dramatic moves in high-profile stocks; buoyant IPO markets; and 'overbought' momentum indicators. Talk of a 'bubble' is growing.

On most measures, US stocks are now clearly expensive relative to their history. The exceptions are those which compare stocks to interest rates and bond yields - which are themselves historically low.

If we were to view the asset class from a 'top-down' approach to investment: we would see them as high, but not outlandishly or prohibitively so. Our preferred metric, a 'cyclically adjusted' PE (CAPE) which smooths out short-term fluctuations in earnings by using a ten-year moving average, is shown in the chart: its ascent has mostly been less dramatic than the 2000 'TMT' episode, and its level - and divergence from trend - is still significantly less pronounced than then.