Bubble Mentality What Might Trigger A Turn In The Market?

By Etf Trends10 days ago

By Roman Chuyan, CFA

  • I show (again) that the stock market valuation is at its highest in at least 150 years.
  • However, reason doesnt apply in a bubble; instead, crowd mentality is in charge.
  • What might trigger a turn in the market? I think inflation and rising rates are inevitable.

Stocks have continued to rise in April, taking the market to an even more-extreme valuation. While the S&P 500 reached an all-time high, corporate earnings havent rebounded from their early-2020 plunge, and in fact continued to decline through Q4-2020 (the latest final EPS available). These trends have brought valuation ratios to an extreme. In its 150-year history, Shillers cyclically adjusted P/E ratio, at 37, has been higher only in 1999-2000:

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The regular P/E ratio is also extreme at 42. It exceeded this level only in 2001 and in 2008 when earnings plunged during recessions. So, its now at its highest non-recession level in at least 150 years:

As I wrote before, this is a bubble, plain and simple. Lets keep in mind that reason doesnt apply in a bubble. Presenting facts and analysis wont change anything. Instead of rational decision-making, crowd dynamics is in charge it will continue until it ends. But make no mistake, it will end as all bubbles do, in a crash. In todays article, I speculate on what might trigger a turn in the market.

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