Source: Jin10 Data
Analysts pointed out that the s&p 500 index and the technology industry are far from collapsing.
According to the "Bubble Prediction" produced by State Street Associates, the probability of a stock market crash in the United States is lower than the average level in the past. These predictions are based on Robin Greenwood, a professor at Harvard University. Robin Greenwood defines a crash as a 40% drop at some point in the next two years, and the current probability of a crash is 18%, which is lower than the average forecast probability of the past five years of 26%.
The same conclusion applies to the high-tech industry, which has generated considerable returns in recent times and has become the focus of many bubble predictions. State Street calculates that the probability of a high-tech industry crash is 4% lower than the five-year average.
Recently, there has been a rise in bubble predictions on Wall Street, but most of the predictive values do not have an accurate definition of the bubble or strict deflation standards, that is, the standard for a crash. Will Goetzmann of Yale University pointed out that without these standards and definitions, bubble predictions reflect more the analyst's subjective views rather than the objective probability of a crash.
Greenwood and State Street's crash probability reflects the performance of the US stock market over the past two years. As the past performance of the US stock market improves, the probability of a crash is also increasing. For example, when the cumulative increase in the past two years reaches 100%, the probability of a subsequent crash is close to 50%. When the cumulative increase reaches 150%, Greenwood said, "the crash is almost certain."
In the past two years, the cumulative increase in the S&P 500 index was 48.9%, far from the level where the probability of a crash significantly increases.
Those who predict that a stock market crash in the United States is imminent point out that there is a huge difference in the rise between the market cap-weighted S&P 500 index and the equal-weighted index. So far this year, the former has risen about 10% more than the latter. Last year, this difference in rise was about 12%.
This difference shows that the performance of the market cap-weighted S&P 500 index is increasingly dependent on the largest stocks in the index. Many analysts believe that this concentration is a sign of an unhealthy market, especially susceptible to declines. However, data since 1970 does not support this.
MarketWatch analyst Mark Hulbert summarized his findings in the chart below. The blue line depicts the extent to which the market cap-weighted S&P 500 index has exceeded the equal-weighted S&P 500 index in the past two years. The red bar graph represents the performance of the market cap-weighted S&P 500 in the following two years. Mark Hulbert said that there is no specific pattern between the blue line and the red bar at a 95% confidence level.
All of this does not mean that the US stock market is not facing challenges. On the one hand, it is highly overvalued. But the market has multiple ways to digest overvalued values, and a crash is just one of them. Based on State Street's bubble prediction, Mark Hulbert said that the market can bet on another way to digest overvalued values, such as "mediocre long-term performance".