This is nuts upon nuts. When’s the crash? 

An earnings/valuation double bubble of Pleistocene proportions. This is nuts upon nuts. When’s the crash? on x (opens in a new window) This is nuts upon nuts. When’s the crash? Over on Main this morning, they’re talking bubbles again:

 [S]ome investors are growing concerned about the speed at which analysts’ estimates are rising. Some fear rising costs for AI companies, a drop in demand for the technology or a difficulty turning spending into profits could see earnings fall short. 

 You know the routine. We’ve done it often enough over the decades. Supernormal profits are unsustainable, because they always are, but trying to time the turn is a mug’s game. Capex trends that have caused investors to crowd into tech hardware and energy stocks aren’t necessarily structural if there’s no clear path to a return on investment, the surge in net borrowing to pay for data sheds risks draining liquidity, and the interest rate outlook is as murky as a reflecting pool. But what of it? Music’s playing, keep dancing. Who wants to be the idiot to go all-cash the day before Zuck announces artificial superintelligence? Prices will either go up or down. There’s no predicting which.

 Reading a lot of market commentary can be tiring. Nevertheless, one thing cut through the blah this week. Here’s the title page of this month’s Panmure Liberum market update from strategists Joachim Klement and Francisca Reis. Our emphasis in bold below: 

 In 1929, the cyclically-adjusted P/E-ratio (CAPE) of the S&P 500 reached 32.6x according to Prof. Robert Shiller’s data. This was 1.8 standard deviations above trend at the time. In 2000, the CAPE reached 44.2x, or 3.3 standard deviations above trend – a clear sign of a bubble.

 However, as our chart below shows, earnings in both instances were within normal range, less than one standard deviation above trend. Today, the CAPE is at 41.0x, or 2.9 standard deviations above trend. Once again, we are clearly in bubble territory for stock market valuations. 

However, unlike in previous bubbles, we are having extremely high CAPE at a time when earnings themselves are 1.8 standard deviations above trend. In other words, we are in a valuation bubble at a time when earnings are in a bubble themselves.

 If we correct for the earnings bubble, the current CAPE would be 67.6x or 4.6 standard deviations above trend, a bubble that surpasses anything ever seen in US history by an extreme margin. 

If valuations followed a normal distribution (which they don’t, so don’t take this literally), this would happen in 0.00019% of months or once every 43,432 years. Here’s where we’d normally add something pithy or sarky or whatever, but what more is there to say? Contact your Panmure representative for the full research.