U.S. stocks have been near all-time highs. Investors have also been pouring money into Europe as well.
Some investors are now worried that stocks are in a bubble.
But BlackRock’s Russ Koesterich makes four key arguments against all the bubble talk.
- Stocks aren’t cheap but their valuations are far from previous cycle peaks. “U.S. stocks trade for around 2.5x book value and for 16.5x trailing earnings. Looking at the last three major market peaks — 1987, 2000 and 2007 — price-to-earnings (P/E) ratios were respectively 23, 30 and 17.5. The price-to-book ratio, meanwhile, peaked at close to 5 in 2000 and 3 in 2007.”
- International stocks are 30-40% cheaper than U.S. stocks. Typically in a bubble, the relationship is reversed.
- Stocks still seem cheap compared to bonds, “which have been bid up through central bank intervention.”
- Despite a strong year-to-date push into the asset class, data shows that investors have continued to be underweight stocks.
Koesterich does admit there are two peculiar reasons that stocks look cheap: 1) profit margins are high and 2) interest rates are low. And, as long as these conditions persist, stocks can still move higher.
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