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News Topical, Digital Desk : Stock Market Crash Alert: A major warning has been issued for investors in the US stock market. According to a report by the Wall Street Journal (WSJ), the valuation of the US market has reached a dangerous level, which has been touched very rarely in history. This level is the Shiller P/E i.e. “cyclically adjusted price-to-earnings ratio”. It has now gone above 40, which indicates that stocks have become expensive and returns from the US market may be very weak, or even negative, in the next 10 years.
The US stock market is currently buoyed by euphoria, particularly driven by AI and tech stocks. Companies like Microsoft, Apple, and Nvidia have propelled the Nasdaq and S&P 500 to new highs. But behind this brilliance lies a significant concern.
The Wall Street Journal reports that US stocks have now reached "skyrocketing" valuations, levels seen only once in history—just before the 1999 tech bubble.
What is Shiller P/E and why is it alarming? This is a unique valuation formula coined by the renowned Nobel laureate Robert Shiller and further developed by Benjamin Graham. It's used to understand how expensive or cheap the stock market is relative to its earnings.
According to the WSJ report, Shiller P/E: -Currently above 40 -This has happened only once in history: the tech bubble of 1999 -Earlier, whenever Shiller P/E reached this high, the returns over the next 10 years were negative: in 1929 (before the Great Depression) and in 1966. Apart from this, the same thing happened in 2000 (dotcom crash), that is, wherever Shiller P/E warned, the market later collapsed. But this time people are saying, "
AI will fix everything. " US bulls argue that this time everything is different because companies are AI-based. The business model is asset-light. Microsoft's operating margin is 5 times that of Exxon Mobil and 10 times that of Walmart. But the WSJ report says that this argument is not sustainable, because - profits do not keep increasing forever - corporate taxes in the US are already lower - the aging population will increase costs - government deficits are very high, which means that the thinking "earnings will always increase" is a dangerous illusion.
Research Affiliates' shock According to the WSJ, the stock category in Research Affiliates' model has the following potential real returns over the next 10 years: US Large Growth (stocks like Magnificent 7) -1.1% US Large Value +1.6% US Smallcap +4.8% Europe and EM (including India) 5-5.4% means while US high-growth stocks are looking weak, India and emerging markets are looking better.
Why it matters for Indian investors Many Indian investors invest in global funds or index funds investing in the US market. If the returns in the US market remain weak for the next 10 years, then the global allocation of Indian mutual funds can be directly affected.
Warning in the end Shiller gives P/E alert, not timing. Sometimes the market can remain expensive for a long time. But history says - when Shiller P/E goes above 40, in the end the prices do not sustain. Prices fall, earnings do not increase.
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