, a new high. Little wonder a sense of unease is settling over markets. Some 40% of global fund managers think that artificial-intelligence stocks—a crucial driver of the rally—are already in a bubble, according to Bank of America’s latest monthly survey. Even Wall Street’s most starry-eyed pundits reckon America’s500 index of leading shares can eke out only minor gains in the remaining nine months of the year. For some, such nervousness portends a crash.
None of this, though, stops anyone from worrying that the valuations of the stocks leading today’s bull run have become too high to offer stellar future returns. A widely watched metric for this is the cyclically adjusted price-to-earnings ratio devised by Robert Shiller of Yale University, which divides prices by the past decade’s-worth of inflation-adjusted earnings. For America’shas been higher than it is today only twice: at the peak of the dotcom bubble, and just before the crash of 2022.
This disparity seems to make little sense. It is one thing to suggest that American firms deserve a higher valuation because there is something exceptional about their growth potential. But why should earnings originating from America boost a share’s price so much more than those from elsewhere? In fact, even the argument that companies outside America merit their current low valuations because they lack dynamism is threadbare. It is frequently couched in terms of the sectoral composition of each market: America’s is brimming with the disruptive tech firms of tomorrow, while Europe’s, for example, is stuffed with stodgy banks and industrial outfits.