Bubble alert: stocks so overpriced they're at tech-mania levels, economist says
Unfortunately, he's not talking about the kind of "V" everyone wants: a snap back as equally sharp as the decline. Rather, Rosie's talking about valuation, and that news is just dreadful.
Rosie told clients Friday that every inch of the 60 percent rally off the March bottom is being driven by "an unprecedented expansion in P/E [price-to-earning] ratios." In other words, investors are paying ever bigger premiums for equities, even as earnings growth prospects continue to lag. That has led us to one seriously overvalued market.
And if you'd like to know how far the market has gotten ahead of the recovery, here's the kicker (emphasis ours):
"By some measures, the S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five-years old as opposed to a recovery that, at best, is in its infancy stages," Rosie wrote.
Considering that economists forecast gross domestic product to grow a tepid 2.8 percent for all of 2010, you can see how this could be a problem for earnings and, by extension, share prices. Rosie's an economist, so he crunched a lot of data, looked at it from a bunch of angles and came to this other disturbing conclusion:
"Going back 60 years, there have only been 14 months when the trailing [P/E] multiple was as high as it is today, and that covers 10 recessions," Rosie said. "This implies that the market is in the top 2 percent expensive terrain historically, and those other times basically covered the tech mania of a decade ago."
As we know from our tech-bubble experience when valuations were stretched to absurd levels, overvalued stocks have a nasty habit of crashing down quickly when the earnings growth investors are paying fat premiums for fails to materialize.