U.S. equity markets “are deeply overbought” and likely poised for a pullback, according to Russell Investments, the latest financial firm to warn about the pervasive irrational exuberance.
In its Q2 Global Markets Outlook, entitled “Fake News Rally?” Russell analysts write that the current optimism about the U.S. stock market, like the pessimism that prevailed for most of last year, is unwarranted. (The S&P 500 gained 9.5% last year; the Dow Jones industrial average 13.4%.)
“Growth has picked up, but not by enough to justify the optimism priced into the S&P 500 … U.S. equities are very expensive.”
(Related on ThinkAdvisor: Bull Market Not Over but ‘Broader Correction’ Coming: Bob Doll)
The report cites that the Shiller P/E ratio, which uses the 10-year average of inflation-adjusted earnings, is at its highest level “outside of 1929 and the late-1990s Internet bubble.”
(Related on ThinkAdvisor: El-Erian: The ‘New Normal’ Is Over)
In addition, according to Russell Investments, “markets are overestimating the ability of President Trump to boost the U.S. economy and forgetting that the U.S. economy is near full capacity. This means that any Trump stimulus is likely to be offset by a more aggressive Fed to contain inflation pressures.”
The Federal Reserve will be “under pressure to continue lifting interest rates,” according to Russell, because “U.S. wages are tracking higher as the unemployment rate settles below 5%.”
The government stimulus plan has yet to be revealed, no less implemented. It’s expected to include both tax cuts and spending on infrastructure, but sentiment is growing that both will likely be less expansive than what was pledged by then candidate Trump on the campaign trail.