BofA sounds alarm: Stock valuations now higher than 2000 bubble — here's what you need to take note of
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Investors surfing on the wave of optimism surrounding AI might want to take a step back and be cautious because Bank of America strategist Michael Hartnett pointed out that the equity market is now pricier than it was at the peak of the dot-com bubble, as per a report.Hartnett presented a striking chart demonstrating the S&P 500's price-to-book ratio, a metric comparing the aggregate market value of the index's constituents to their net assets has risen to 5.3, an all-time high, as per Busienss Insider. That is higher than the previous high of 5.1 in March 2000, when the tech bubble was about to burst, according to the report.For people who think "this time is different" since AI firms are in fact yielding profits, Hartnett highlighted that, "It better be different this time," as quoted by Business Insider.It's not a single measure flashing red. Hartnett also pointed to the S&P 500's 12-month forward price-to-earnings multiple, which is its highest since the dot-com bubble, apart from August 2020, as per the Business Insider report. The Shiller cyclically-adjusted price-to-earnings ratio, which matches prices to a 10-year moving average of earnings, is near historical highs reached in 1929, 2000, and 2021, according to the report.ALSO READ: Apple just dropped 2 free iPhone apps with iOS 26, and users can't stop talking about them While high valuations tend to mirror high expectations for future growth, particularly with AI companies continuing to surpass earnings estimates, which suggest the optimism could be justified, as reported by Business Insider. However, sometimes those expectations turn out to be too elevated, and prices correct, but they don't necessitate a bubble scenario, according to the report.But valuations are better predictors of average long-term returns compared to near-term performance, and views on Wall Street on where the market goes in the months ahead differ, even though, there are calls for caution, many strategists continue to raise their year-end S&P 500 price targets, as reported by Business Insider.ALSO READ: In times of AI, Microsoft engineer reveals secret formula for 4 promotions in just 5 years Recently, the chief investment officer of global fixed income at BlackRock, Rick Rieder said that the market is in the "best investing environment ever" due to factors like strong demand for stocks, looming rate cuts, and recent boosts in productivity and earnings growth, as per the report.ALSO READ: Is it AI or Trump's policies? US sees brutal 140% layoff spike in July, worst surge since early COVID chaos Hartnett also pointed out that if the market does start to unwind, he sees bonds and non-US stocks benefiting, according to Business Insider. Examples of funds that offer exposure to these trades include the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard FTSE All-World ex-US ETF (VEU), reported Business Insider.Because the S&P 500 is now valued higher than it was at the peak of the 2000 dot-com bubble, a level that eventually led to a major crash, as per the Business Insider report.Not necessarily. High valuations don't guarantee a crash, but they often lead to lower long-term returns.
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