US Stock Markets Are Overvalued, Chorus Gets Loud

Despite the crash in US stock markets from their all-time highs, many fund managers think that markets are currently overvalued.

Mohit Oberoi, CFA - Author

Sep. 4 2020, Updated 6:53 a.m. ET

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  • Despite the crash in US stock markets from their all-time highs, many fund managers think that markets are currently overvalued.
  • David Tepper, Paul Tudor Jones, Mark Cuban, Jeffrey Gundlach, Stanley Druckenmiller, and Jim Rogers are among the fund managers who have cautioned on valuations after the recent rally.
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Are US stock markets overvalued?

In a report on May 8, FactSet said that the forward PE ratio for the S&P 500 is 20.4. The ratio is above the five-year and ten-year average. Over the past few years, US stock markets’ valuation has generally been above the long-term average. The S&P 500’s valuation fell below the ten-year average in March as the markets crashed.

Due to economic uncertainties and macro challenges, US equity markets look overvalued at these price levels. Markets seemed overvalued at the beginning of the year as well. Meanwhile, several fund managers expressed their opinion about US stock markets’ overvaluation.

Mark Cuban on US stock markets’ valuation

Recently, billionaire Mark Cuban said that US stock markets are overvalued. He said, “I think it’s almost impossible to predict where consumer and corporate demand is going to come from.” Cuban added, “And because of that, it’s hard to create a valuation for businesses.” Cuban had a word of caution for investors. He said, “I think people are naturally optimistic right now in terms of the market. I just don’t think they are really factoring in what we are going to see on the other side.”

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David Tepper and Stanley Druckenmiller

David Tepper and Stanley Druckenmiller also think that US stock markets are overvalued. Tepper, who founded Appaloosa Management, thinks that the “market is pretty high.” In March, he sounded cautious. In contrast, Bill Ackman went overboard with buying stocks. His bet played out well. US stock markets have rebounded sharply from their March lows.

Stanley Druckenmiller said that US stock markets’ risk-reward ratio isn’t favorable. As several experts warned about a US stock market crash, President Trump lashed out at them in a tweet.

Is a double bottom coming in the US stock market?

Typically, we see a double bottom in bear markets. Paul Tudor Jones and Jeffrey Gundlach are among the fund managers who predict a crash in US stock markets towards their March lows. Meanwhile, markets have jumped sharply from their March lows. The Nasdaq Index (NASDAQ:QQQ) briefly turned positive for the year, while the S&P 500 (NYSEARCA:SPY) almost reclaimed its 3,000 level.

Apart from these fund managers, Goldman Sachs expects the S&P 500 to crash to 2,400. A UBS survey showed that high net worth individuals are also sitting on higher cash and expect markets to fall.

What’s Warren Buffett thinking?

Warren Buffett increased his cash position in the first quarter despite the US stock market crash. He has also exited all of the airline stocks that Berkshire Hathaway held. While Buffett said that he won’t bet against what he calls the “American tailwind,” his rising cash pile is a note of caution on the overvaluation. Read Warren Buffett’s Advice during Berkshire Hathaway’s Meeting to learn more.


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