LPL’s Kleintop: Is the Party Over in Stocks?

Consumer confidence is at six-year highs, and investors are feeling pretty good, too. But does that mean there’s a bubble in the stock market?

LPL Financial (LPLA) chief market strategist Jeffrey Kleintop tackles that question in a report released Wednesday. He zooms in on the price-to-earnings ratios of 62 industries today versus 14 years ago, at the top of a bull market.

“The stock market was really ‘bubbly’ in March 2000,” Kleintop writes, “with valuations of many industries floating higher, but now industry valuations are relatively flat.”

In late March 2000 — the tech-bubble era — 16 of 62 industries accounted for about 70% of the S&P 500’s total market value and had P/E ratios that could be called “bubbly,” i.e., more than 30.

Fourteen years later, only four industries out of 62 — accounting for less than 4% of the S&P 500’s current market value — have P/E ratios over 30, the strategist points out.

While in 2000, IT firms and industries were overvalued, today’s high P/E ratios can be found in real estate/REITs, health care technology, Internet and catalog retail, as well as in construction materials. 

“At any given time, there are always some bubbly valuations among industries and stocks that are hot,” explained Kleintop. “But overall, the S&P 500 PE is currently a bit over 16 on current fiscal year estimates, slightly above the long-term average, but only half of what it was in late March 2000.”

Thus, his conclusion is that today’s stock-market party “is not yet close to being over.”