A leading economist has warned investors over the current state of stock valuations on the United States and Australian exchanges and the associated implications of this situation if economic conditions in the two regions experience significant change.
“The valuations [in equity markets] have increased really quite significantly. The S&P 500 has increased by 15 per cent over the past year and the ASX 200 by 12 per cent,” Challenger chief economist Dr Jonathan Kearns noted during a recent online briefing.
Kearns indicated valuations in the US market had been driven predominantly by the Magnificent 7 stocks – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.
“We’ve seen the share of the S&P 500 contributed by the Magnificent 7 is back up around 35 per cent,” he said.
He recognised the high equity valuations have been reflected consistently across several measures.
“We see this in price-equity ratios and price-earnings ratios. But even if we look at price to book or price to sales, various different metrics, valuations are very high,” he explained.
“[It means] there is not much room for them [in the event of] bad news. The markets are very much pricing for perfection.”
According to Kearns, Australians stock market valuations are not quite as extreme as those in the US, mainly due to the fact a wider variety of industries account for the make-up of the ASX 200.
However, he pointed out the high valuations do make other asset classes appear more favourable with regard to some specific types of returns.
“It means in the near term the yield that you can get out of equities relative to the yield coming out of fixed income [is not so good and shows] bonds are looking really good,” he said.
“So fixed income is providing a bit of stability and a safe harbour at the moment given the high valuations of equities.”