David Rosenberg, founder of Rosenberg Research, has cautioned about a possible “gigantic price bubble” in the stock market.
This warning comes amidst concerns over the S&P 500’s forward returns due to current valuations. Rosenberg, who is recognized for his bearish economic perspective, voiced his apprehensions regarding the S&P 500’s future returns in light of the present valuations.
The Shiller cyclically adjusted price-to-earnings ratio of the index stands at approximately 37.5, making it the third-most expensive level in history, surpassed only by the peaks in 2021 and 2022.
As per the report by Business Insider, the valuations have traditionally served as dependable indicators of long-term stock market performance. According to Rosenberg’s data, which was quoted by the outlet, when the market hits such elevated valuation levels, one-year forward returns have typically been negative.
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However, Rosenberg’s concerns extend beyond valuations. He also highlights a deteriorating economic environment, indicated by signs of decelerating job growth. Bureau of Labor Statistics data reveals that job growth has been under 100,000 per month for the past four months.
Rosenberg anticipates a further decline in the economic outlook, with initial jobless claims escalating to 263,000 last week. He proposes that the US economy might already be experiencing, or on the verge of, a downturn.
Despite these alarming indicators, stocks persist in achieving all-time highs. Rosenberg interprets this as a symptom of a price bubble. “We are in a gigantic price bubble that is ongoing. And you know it’s a price bubble when prices move up in the face of negative fundamentals,” he said.
“This is what a euphoric state looks like we’re seeing it in real time,” Rosenberg added.
Rosenberg’s warning comes at a time when the stock market continues to reach record highs despite the negative economic indicators.
This disconnect between the market performance and the economic fundamentals could potentially lead to a significant market correction.
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