Are we on the brink of a stock market crash? According to noted economist David Rosenberg, the answer may be yes. In a recent analysis, Rosenberg pointed out that the stock market is currently primed for a correction due to historically high equity valuations.
Over the past year, the S&P 500 has surged by 26%, while earnings growth has only increased by 6%. This imbalance has led to an expansion in the S&P 500’s forward price-to-earnings valuation multiple, which now stands at 21x. According to Rosenberg, this rapid increase in valuation has only occurred 5% of the time over the past three decades.
Despite this surge in equity valuations, future earnings expectations remain lackluster. The Wall Street consensus for the S&P 500’s 2024 earnings per share has not changed since October, even as the market has rallied nearly 30%. This lack of earnings growth, coupled with skyrocketing valuations, has led to a crashing equity risk premium.
Rosenberg warns that the stock market is currently in a “huge bubble”, comparable only to the tech mania of 1999-2000. While high valuations do not guarantee an imminent crash, they do suggest that the market may be overvalued.
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