History does not repeat itself, but it often rhymes. At the peak of the US stock market in 2000, which many now call the technology bubble, US stock valuations reached new all-time highs. P/S ratio of the main US stock index S&P 500 reached 2.3 and for the sub-index of technology companies this indicator reached 7.5.
The current values of the P/S indicator are at similar levels. S&P 500 index is currently trading at 3.2 times its annual sales, which is even significantly, specifically by 40%, higher than in 2000. P/S of the sub-index of technology companies is currently exactly at the value from 2000, i.e. at the level of 7.5.
So are US stocks in the bubble right now, just like 21 years ago? Definitely yes purely according to stock valuations. For this reason, I believe that the average annual expected returns of US stocks over the next five years are strongly below average compared to historical trends and at the same time significantly lower than for major global stock indices or the Central European region, which we strongly prefer in our asset allocation. This is a key reason why we have US equities strongly underweighted against benchmarks. At the same time this means that US stocks have a significantly lower weight in our investment portfolios compared to the neutral strategic asset allocation.
Investment Strategist at Conseq Investment Management, a.s.