This statement reminds one of Greenspan's warning about "irrational exuberance" in 1996, four years before the Internet Plus-Related bubble burst.
Former Federal Reserve Chairman Alan Greenspan warned of "irrational exuberance" in 1996, and now Fed Governor Lisa Cook has come forward to caution that "US stock valuations are too high"; direct warnings from Fed officials about market risks are quite rare.
According to MarketWatch, on Monday, Fed Governor Lisa Cook issued a rare direct warning about the stock market. She stated:
Valuations across multiple asset classes are high, including the Stocks and CSI Enterprise bond Index markets, with expected risk premiums in these markets close to the bottom of historical distributions. This means the market may be priced to perfection, making it susceptible to sharp declines, potentially triggered by bad economic news or changes in investor sentiment.
This statement evokes the warning of "irrational exuberance" articulated by former Fed Chairman Greenspan in 1996, but unlike Greenspan's comments, which had an immediate impact on the stock market, Cook’s warning seems to have been ignored by the market. The S&P 500 Index climbed back above 6000 points that day, nearing historical highs, and although the gains narrowed afterwards, it still closed with an increase of 0.6%.
It cannot be denied that, based on historical standards, the market's valuations are indeed at historical highs from multiple Indicators:
According to Goldman Sachs, the ratio of the S&P 500 Index to its book value and sales is two standard deviations above the average level of the past decade.
The cyclically adjusted PE (CAPE) ratio by economist Robert Shiller is about 37, close to its highest level since the bursting of the Internet bubble.
The S&P 500 Index achieved an increase of at least 20% for the second consecutive year last year.
However, high valuations do not necessarily mean that the market is about to crash. Just as Greenspan's warning came four years before the peak of the Internet bubble, high valuation conditions can persist for quite a long time.
Art Hogan, Chief Market Strategist at B. Riley Wealth, stated:
Greenspan was not wrong, but he made the decision four years early, and since then officials seem to have been trying to avoid commenting on valuations.
Meanwhile, five of the eleven sectors of the S&P 500 Index are expected to outperform the large cap index by the end of 2024, indicating that the rally has begun to expand beyond the Magnificent 7, which, if true, may help alleviate valuation concerns.
Almost every Wall Street strategist expects the stock market to rise. Even the few analysts expecting a market downturn, such as Stifel's Barry Bannister, stated that apart from valuation, other factors (like economic deterioration) are needed for the stock market to pull back.
Meanwhile, if the fundamentals begin to deteriorate, excessive valuations may make the market vulnerable.
Kevin Simpson, CEO of Capital Wealth Planning, stated in a report on Monday:
The earnings report season for the fourth quarter will begin next week, and we expect earnings to be the focus as investors seek earnings growth to support current valuations and analyze how companies will respond to the Federal Reserve's interest rate cuts.
The market generally expects the EPS growth rate for 2025 to be close to 15%, which is more than double the historical average. If the earnings report season has any impact on expectations, particularly those from large technology companies, this will intensify concerns about valuations.
