Stocks are in a 'rare state' -- here's what happens when they get as expensive as they are right now

US stocks are in record territory, yet they have shown no real signs of needing to taking a break.

Last month, the Dow Jones Industrial Average, S&P 500, and the Nasdaq recorded “the longest triple winning streak in 25 years” despite a barrage of headlines suggesting stocks were going too far too fast. 

A few months earlier, stocks got expensive enough to match valuations that only happened at the peak of previous bubbles.

More recently, Jeff Saut of Raymond James showed corporate insiders sold s$7.8 billion worth of stocks (the most in 6 years), yet bullish sentiment reached a high 92%.

Then there is a range of market indicators, like the VIX  and the flattening yield curve, that suggest complacency is high and the current bull market is unlikely to last very long.

All of this data, of course, comes with the warning of an impending doom.

Yet the latest snippet about the current rally is not as bearish as the rest. This one comes from Brian Belski, chief investment strategist at BMO Capital Markets, whose finding was shared on Twitter by CNBC’s Michael Santoli.

“Stocks in a rare state, crossing above 20x P/E w/ 20% gain over the past year,” Santoli wrote before sharing a chart showing how the market performs subsequently.

“Both of these metrics have simultaneously crossed these thresholds only 10 times since 1954,” wrote Belski in his note to clients.

This does not mark the end of the bull market in stocks, though, according to Belski. “We firmly believe that U.S. stocks remain in the midst of a secular bull market with many years of life left to it,” he said. He warned, however, that “things have gotten a little ahead of themselves” and “there will be a fair amount “back-and-forth” trading action in the coming months.”

As the table (from Belski) below shows, on average, the market gains 3.9% over the next 12 months, although that drops to 1.1% when excluding the tech bubble. The market has gained in five of the previous nine instances when the market rallied more than 20% year-over-year while also crossing the high PE mark of 20.

Belski sees earnings growth fuelling the next rally in stocks. “We believe earnings growth will be required for the next leg higher,” he said. “We see the market transitioning to an EPS-driven from P/E-driven environment.”

Notably, billionaire investor Warren Buffett recently said he sees stocks “on the cheap side.”

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