While it seems every other bear has now thrown in the towel, Jeremy Grantham remains undaunted, telling The New Yorker, “technology-based financial optimism prevalent on Wall Street has been characteristic of many speculative episodes, including the development of canals in England and railroads in the United States.”
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From a valuation standpoint, it’s difficult to argue with his labeling stocks a “bubble.” As Mike Green points out, “The S&P 500 earnings yield is often compared to nominal bond yields. This is not correct. Earnings yield is a ‘real’ number (Nominal Earnings/Nominal Price) and should be compared to real bond yields (TIPS). The spread to the 30-year inflation-protected bond has now hit the lowest on record.”
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As Grantham points out, much of this unprecedented valuation extreme can be explained by “technology-based financial optimism.” To wit, “Consensus estimates among Wall Street analysts for long-term earnings growth are at one of the highest readings as AI hype sweeps across a bullish crowd,” notes Callum Thomas
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That optimism can also be seen in the extreme positioning of speculative traders. As Jason Goepfert writes, “Sentiment and positioning aren’t the main drivers of asset prices, but they are *a* driver. And hoo boy, there are signs that folks are way offside. Like 100x more assets in leveraged bullish funds than bearish ones, the first time ever.”
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Meanwhile, stock market breadth has deteriorated in way rarely seen before as money flows mainly into a handful of the most popular Big Tech stocks.
According to Bank of America (via The Daily Shot), monthly market breadth hit an all-time low in December which clearly suggests the extreme optimism on the part of investors could be misplaced.