What’s Going On Here?Goldman Sachs said over the weekend that certain US stocks are in bubble territory, and one wrong move now could set off some serious alarms. What Does This Mean?There are three groups of stocks that Goldman thinks have attracted unsustainably high interest from investors. First, there’s special purpose acquisition vehicles, or SPACs: that is, listed companies that merge with unlisted companies to help them join the stock market. SPACs have raised more money so far this year than they did in the whole of 2019 (tweet this). Then there’s stocks of loss-making companies, which have outperformed the US stock market by 40% on average over the last twelve months.
Still, Goldman isn’t too worried about those bubbles: neither group of stocks is big enough to do any widespread damage if investor enthusiasm suddenly dries up. But there is one group the bank's nervous about: high-growth and expensive stocks. They account for almost 10% of the entire US stock market value, and they’re involved in almost a quarter of all US stock trades. So if that bubble bursts, you can bet it’ll leave investors’ ears ringing… Why Should I Care?For you personally: It’s lose-lose.
Even if you believe these bubbles are some way off bursting, history suggests it’s not actually in your interests to buy in. After all, the median company whose value exceeds 20x its revenue has seen its share price drop 1% in the twelve months afterward. Compare that to the median US stock without such a high valuation: that’s risen 6% over the same time period.
The bigger picture: A matter of perspective.
US stocks are, by most metrics, looking expensive right now. But Goldman has pointed out that relative to ultra-low interest rates, they’re actually pretty cheap. The bank even reckons American companies’ strong earnings growth will drive the stock market higher still – 12% higher, to be precise. | 