Are US stocks too expensive?

Robert Armstrong (0:00)

Special note to listeners, we're very keen to hear your questions and answer them on the air. If you have burning questions about markets, finance or the economy, send them to robert.armstrongatft.com.

Katie Martin (0:22)

Pushkin. USA. Heaven knows we've talked about it a few times on this show, but here's the thing. Some smart people are starting to worry that this whole US exceptionalism malarkey has gone too far. Today on the show, we're going to figure this out once and for all. We've got two questions. First, is this a bubble in the US? And second, can I get through this podcast without a huge coughing fit? There's only one way to find out.

Stop it, Rob. Time is short. I could die at any moment.

Robert Armstrong (0:56)

I know. Both of us. If we both die while recording this podcast, it's going to become a classic. That would be a glorious way to go out on air.

Katie Martin (1:06)

Anyway, push. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in a rather dark and wintery London. Thank you so much to my very lovely colleagues, Josh Oliver and Chris Giles, for stepping in last week while I was in my sick bed. Joining me down the line from New York City is Mr. Robert Armstrong, master of the Unhedged newsletter, who is slowly emerging from his Thanksgiving food coma.

Robert Armstrong (1:35)

It's true. I had a food coma and then I got a cold. So I've been in two different medical conditions.

Katie Martin (1:41)

Is Thanksgiving basically just like a huge national germ sharing exercise?

Robert Armstrong (1:46)

Yeah, that's basically what it turns out to be. But you have it too. We both have it. But somehow it got across the Atlantic too. So we all got it.

Katie Martin (1:53)

It's really going around. Everyone is ill. It's very, very boring.

Robert Armstrong (1:56)

But the disease we're really interested in is bubble disease in the US market.

Katie Martin (1:59)

Bubble disease, the worst disease. So look, you do some talking while I rest my voice. Why can't we just have nice things, right? So US markets are doing really, really well. So who is crying bubble and why can't we just ignore them?

Robert Armstrong (2:13)

Ruchir Sharma, who is an FT contributing editor, I think his title, he writes a periodic column in the paper.

Katie Martin (2:18)

Very, very good one.

Robert Armstrong (2:19)

Very good column. Basically came out and stomped his foot and said, the US is in a bubble, a sentiment with which I happen to agree. So his point is a relative point. His point is that US stocks are more expensive relative to global stocks than they've ever been since we've been keeping track of these sorts of things. The killer stat he uses is 70% of global stock indexes of like the main global stock indexes is US stocks. In the 1980s, it was 30%.

And yes, we all know that the US has some special strengths, but this has really gone too far. And I would add to his point that in absolute terms, US stocks are about as expensive as they ever get. And you can use whatever model you want. There are some people who would argue with that, but by most measures, they're extraordinarily expensive and getting more so.

Katie Martin (3:28)

I am one of the people who would argue with that, right? So there are two analogies that people bring up when they want to say this is all getting ridiculous, Abandon hope or you who enter here. One of them is, this smells quite a lot like Japan. Like at a certain point, Japan occupied a massive proportion of the global stock universe, and that all ended in tears. The other is, this all smells like the.com boom. You've got like a smallish number of big tech names that are just kind of flying up to the moon. It's just not clear to me that either of these things really applies, not least because these stocks, you look at the kind of NVIDIAs and Microsofts of the world. They're doing incredibly well, but their earnings are doing incredibly well. What's to worry about here?

Robert Armstrong (4:15)

The extremes aren't as extreme as the Japan and.com case. The thing about those two cases is that you had individual asset classes in the case of real estate in Japan, and individual stocks is in the case of like Cisco in the US, which were not at 40 times earnings. They were like 120 times earnings. They were massively expensive. The famous thing like the Imperial Palace in Tokyo, the land it's on, costs more than all the land in California or something, it was bonkers. And now is different in this respect, because now it's like everything is quite expensive, rather than a few things being mind bogglingly expensive. So that is actually different.