Albert Edwards, the Société Générale strategist renowned for his prescient call on the dot-com bubble, is sounding alarms once again—this time on a looming “everything bubble” in US stocks and housing. His latest note, published under the bank’s “alternative view,” offers a sobering perspective that investors and advisors can’t afford to ignore.
The Bubble That Won’t Pop—Yet
Edwards points to sky-high valuations in the US equity market, with the Shiller cyclically-adjusted price-to-earnings (CAPE) ratio hitting 38—levels rarely seen outside of market euphoria. The S&P 500’s trailing and forward P/E ratios also remain historically elevated. What makes this situation precarious is the backdrop of rising long-term interest rates. Typically, when bond yields climb, they present a more attractive risk-adjusted return alternative to stocks, which should pressure equity valuations downward. Yet, US stocks have defied this logic, rallying 78% since the October 2022 lows.
This disconnect is a classic warning sign. Edwards highlights the unusual resilience of stock valuations despite the headwind of rising bond yields, suggesting that the market’s current complacency may soon be tested. According to data from the Federal Reserve and Société Générale, the 30-year Treasury yield has been grinding higher, yet the equity market’s nosebleed valuations persist—an anomaly that historically precedes corrections.
Housing: The Last Bubble Standing?
Turning to real estate, Edwards notes that the US home price-to-income ratio has remained stubbornly high post-pandemic, unlike in the UK and France where it has started to normalize. This divergence is critical. The US housing market’s refusal to “de-rate” despite rising bond yields is an outlier and a potential fault line. Investors should be wary; housing bubbles tend to burst when affordability collapses, and rising mortgage rates driven by higher bond yields are already straining buyers.
A recent report from the National Association of Realtors showed that mortgage rates have climbed above 7%—levels not seen in over two decades—putting additional pressure on housing affordability. This dynamic could force a market correction that reverberates beyond just homeowners, affecting banks, construction, and consumer spending.
The Japan Factor: A Global Wildcard
Edwards points to Japan as a critical trigger for a global market correction. The ruling party’s loss of Upper House majority has heightened concerns about fiscal easing and inflation in Japan, which could push interest rates higher. The Bank of Japan’s unexpected rate hike in 2024 already sent shockwaves through global markets, as investors unwound the yen carry trade—a strategy where cheap yen borrowing funds investments in higher-yielding US assets.
This unwinding could accelerate, leading to tighter global liquidity and higher borrowing costs, which would exacerbate vulnerabilities in both US stocks and housing. The potential for a “global financial Armageddon,” as Edwards warned earlier this year, is not just hyperbole but a scenario investors must prepare for.
What Should Investors and Advisors Do Differently?
-
Reassess Risk Exposure: With valuations stretched and bond yields rising, it’s time to critically evaluate portfolio risk. Consider trimming allocations to highly valued growth stocks and overexposed real estate assets.
-
Increase Cash and Fixed Income Diversification: As bond yields rise, fixed income becomes more attractive. Diversifying into higher-quality bonds and short-duration instruments can provide a buffer against equity volatility.
-
Monitor Japan’s Fiscal and Monetary Moves: Global investors should keep a close eye on Japanese political developments and central bank actions. Sudden shifts could trigger rapid market repricing.
-
Focus on Quality and Earnings Resilience: In uncertain times, prioritize companies with strong balance sheets, consistent cash flows, and pricing power to weather economic headwinds.
-
Prepare for Volatility: Historical precedent and Edwards’ analysis suggest that corrections could be sharp. Advisors should communicate clearly with clients about potential risks and ensure portfolios are aligned with their risk tolerance.
What’s Next?
We are at a crossroads where traditional market relationships—between bond yields and equity valuations, housing affordability and prices—are being challenged. Edwards’ warnings, backed by data from Société Générale and corroborated by broader market trends, suggest that complacency is dangerous.
Investors ignoring these signals risk being caught in a sudden market correction that could impact wealth and retirement plans. The prudent path is not panic but preparation: recalibrate portfolios, diversify, and stay informed about global macroeconomic shifts, especially those emanating from Japan.
In essence, the “everything bubble” may not burst tomorrow, but the pressure is building. Those who act now, informed by a nuanced understanding of these dynamics, will be best positioned to navigate the turbulence ahead.
Sources:
- Société Générale Research Notes
- Federal Reserve Economic Data (FRED)
- National Association of Realtors Mortgage Reports
- Business Insider Interview with Albert Edwards
Stay tuned to Extreme Investor Network for ongoing expert analysis and actionable insights that keep you ahead of market shifts.