The bull rally in stocks continues to paw at the dirt, with both the Dow and S&P 500 indexes charging to new highs last week and momentum set to continue into the week ahead.
And worries of a bubble are blowing. Earlier this month, China’s top banking regulator warned that Wall Street assets were trading at such high levels that they are bound to correct.
But stocks aren’t in a bubble, according to Goldman Sachs /zigman2/quotes/209237603/composite GS +2.94% . In our call of the day , analysts led by Peter Oppenheimer outline nine key characteristics of historic bubbles and discuss how they don’t match the current market environment.
The investment bank defines a stock market bubble as a “rapid acceleration in prices and valuations that makes an unrealistic claim on future growth and returns.”
Goldman Sachs’ study is based on historical stock bubbles, including the “Tulip Mania” in the Netherlands in the 1630s, the 1873 “Railway Bubble” in the U.S., and the 1990s global technology bubble.
One of the key hallmarks of bubbles is excessive price appreciation and extreme valuations. And while the investment bank acknowledges “pockets of exuberance,” and some excessive price rises in U.S. equities, the analysts argue that it doesn’t necessarily mean that a broader and “systemically dangerous” bubble is forming. The recent rise in the S&P 500 index, and particularly in the technology sector, is impressive but not extreme, the analysts say.
Similarly, another bubble telltale is the idea that “this time is different,” with a narrative that justifies new ways of valuing companies. But, the Goldman Sachs analysts argue, this time isn’t different, and the main argument supporting higher prices right now is mainstream: Interest rates are low.
Past bubbles have often included excitement around a particular sector leading to market concentration. And it is true that the group of FAAMG stocks — Facebook /zigman2/quotes/205064656/composite FB -0.07% , Apple /zigman2/quotes/202934861/composite AAPL -0.61% , Amazon /zigman2/quotes/210331248/composite AMZN -0.18% , Microsoft /zigman2/quotes/207732364/composite MSFT -0.18% , and Google, owned by Alphabet /zigman2/quotes/202490156/composite GOOGL +1.36% — representing Big Tech has come to dominate indexes and investor attention.
But the analysts argue that not only is this representative of a transformative period in technology, but the fundamentals back these companies up. The groups are highly cash-generative, and metrics like earnings per share in Big Tech and other retail investor favorites “have significantly outstripped those of the rest of the market.”
The investment bank also finds that while the current market has some characteristics of bubbles, like frantic speculation, easy credit and rising leverage, booming corporate activity, and “new era” narrative driving a tech boom, these factors were mitigated by forces including regulation and stability in the wider market. We’re also not late in an economic cycle and widespread accounting scandals haven’t come to light — these are other critical markers of bubbles.
Goldman Sachs’ findings are summarized in the table below:
The analysts conclude: “While there are pockets of excessive valuations in equities, and parts of the market are justifiably derating as interest rates adjust, in our assessment only a few of these common characteristics are currently present or being partially met.”
According to Goldman Sachs, the risks of an imminent bubble “with systemic risks to the financial system and economies” is relatively low.
The Turkish /zigman2/quotes/210561870/realtime/sampled TRYUSD -0.4902% lira crashed as much as 15% against the U.S. dollar after President Recep Erdoğan sacked the country’s central bank chief, Naci Ağbal, after just four months on the job. The central bank raised interest rates by 2% last week and Ağbal has been credited with pulling the lira back from historic lows.
It is a light day on the economic front . Existing home sales data for February came in below expectations—6.22 million compared with 6.5 million expected.
Asset manager Apollo Global Management /zigman2/quotes/203829595/composite APO +1.63% said chief executive Leon Black has been replaced by the group’s co-founder, Marc Rowan, and that Black’s role as non-executive chair of the board has been taken up by Jay Clayton.