The narrative that the stock market is in a bubble has been growing on Wall Street as valuations and retail inflows reach new heights. But Goldman Sachs’ chief global equity strategist says the market isn’t in a full-fledged bubble.
Petter Oppenheimer, who is also Goldman’s head of macro research in Europe, led a study that looked back over 300 years of markets and market bubbles. His team identified a number of properties that typically characterize a market bubble: excessive price appreciation, extreme valuations, a narrative that investing has reached a “new era,” increased market concentration, high speculation, strong investor inflows, and strong corporate activity. He summed up his study on a Tuesday episode of the “Exchanges at Goldman Sachs” podcast.
While Oppenheimer says that many of these characteristics are present in the market today to some degree, he doesn’t see the “full level of bubble activity that would suggest that there’s anything systemic as a risk building up.”
A hallmark of bubbles from the past has been intense speculation, and Oppenheimer says we’re not seeing that broadly at the moment. During the Dutch tulip mania in the 17th century, the price of a tulip bulb cost the same as a luxury townhouse in Amsterdam, he said. In the dotcom bubble, major large cap stocks each increased by 1000% in a single year.
“We’re not seeing that scale of price appreciation. We’re seeing pockets of it,” Oppenheimer said. “And there are a growing number of companies in the stock market that had very high valuations and enterprise value above 20 times, for example… We’re seeing a higher proportion of those companies than we’ve seen since 1999. And that’s true in the US and in Europe. But it’s not the breadth of this kind of speculation that we’re seeing at the moment that would have been typical in the past.”
Oppenheimer also said that while stock valuations have risen, a lot of the price appreciation has been a function of historically low interest rates and supportive policy conditions.
One segment of the market that’s seen large price appreciation and market concentration is technology stocks. However, Oppenheimer says mega-cap tech names are not reflective of a bubble because, “a bubble really is about the promise of potential growth or the hope of potential growth long into the future. That’s certainly what happened during the technology bubble in the late 1990s.”
While the technology companies of today have become very large, they’re also extremely profitable. They’ve seen roughly three times the average sales growth of the rest of the market, and roughly twice the average net income growth over the last few years, Oppenheimer said.
He added on mega-cap tech: “…absolutely, they’ve become very large. That’s not unique in periods of significant technological innovation in history. But being large and seeing strong price appreciation is not the equivalent of being a bubble, I think, because these have actually been very profitable parts of the market.”
Another classic characteristic of a stock market bubble is “wide speculative inflows” into assets, particularly from retail investors. Oppenheimer noted that global equities just lodged their largest quarterly inflow on record.
He added that over the last 10 years, the only group of investors that was a net buyer of stocks was the corporate sector, due to share repurchases. Most investors, including pension funds and households, were actually net sellers.
“And you know, we do have very strong and large amounts of money still sitting in cash balances so, despite these large outflows of money market funds into equities, in the US there’s still around $5 trillion of money sitting on money market funds. And that’s about a trillion dollars higher than we saw at the start of 2020,” he added.
Oppenheimer concluded that while valuations, particularly in equities, are “very high relative to history,” they’re partially a function of low interest rates and not yet comparable with other bubble periods. He is, however, concerned about what they mean for future returns.
“So, I think high valuations are a concern,” said the strategist. ” It does tell us something about the prospect of longer-term returns, which will likely be lower. But I don’t think we have the kind of broad, excessive valuations which would suggest any imminent likelihood of a major collapse in markets.”