Subramanian said in a Monday note that she had a \u201cfull week of feedback and pushback\u201d since making her bullish call, including a direct question on a call that went something like: \u201cSavita, are you forecasting a bubble?\u201d The answer to that question is no, Subramanian insists\u2014and she\u2019s ready to address the concern.\u00a0<\/p>\n
In an FAQ issued by Bank of America<\/a> Research, the veteran analyst explained that despite all the fears over a potentially irrationally exuberant market, prior market bubbles have typically featured a few key factors\u2014mainly \u201ca gap between price and intrinsic value\u201d and \u201crampant speculation\u201d\u2014and the current market doesn\u2019t fit the bill. \u201cHousing in 2007, tech in 2000, tulips in 1637 are examples that tick these boxes. But the S&P 500 today does not,\u201d she wrote.<\/p>\n Still, with AI fervor harkening back to the internet era as it pushes some tech stocks ever higher, a few Wall Street experts have made comparisons to the dotcom bubble. Now, there\u2019s an argument over whether we\u2019re repeating 1995<\/a>, and the tech bull run is just getting started, or whether it\u2019s more like 1999<\/a>, and a crash is right around the corner.\u00a0<\/p>\n Subramanian reassured readers that, in her view, it\u2019s \u201cmore 1995.\u201d From investors\u2019 relatively subdued sentiment levels to rising productivity and the fundamental strength of Big Tech leadership, this isn\u2019t a bubble just yet.<\/p>\n The first criticism of Subramanian\u2019s bullish prediction for the S&P 500 has to do with market valuations. The S&P 500 currently trades at roughly 20.5 times forward earnings, compared with an average of 15.8 since 1986, according to BofA data.<\/p>\n \u201cThe gap between price and intrinsic value is high, based on snapshot P\/E multiples,\u201d Subramanian admitted. \u201cBut the ex\u2013Magnificent Seven trades closer to long-term average multiples, and, more importantly, today\u2019s index lacks comparability to prior decades\u2019, in our view.\u201d<\/p>\n The veteran strategist noted that highly valued Big Tech stocks are obscuring the true valuation of the overall market. To her point, the Magnificent Seven\u2014a group that includes Microsoft<\/a>, Google<\/a>, Apple<\/a>, Nvidia<\/a>, Tesla<\/a>, Meta, and Amazon\u2014trade at roughly 38 times their trailing<\/a> 12-month earnings, compared with 23 times for the S&P 500 as a whole.<\/p>\n Subramanian also pointed out that the S&P 500\u2019s constituents are quite different from what they used to be, which makes comparing the index\u2019s valuation with its historical average less valuable.<\/p>\n \u201cValuation matters. But comparing a trailing P\/E today to a trailing P\/E of prior decades makes little sense given the index\u2019s mix shi\u017ft,\u201d she wrote. \u201cToday\u2019s S&P 500 is half as levered, is higher quality, and has similar or lower earnings volatility than in prior decades.\u201d<\/p>\n The second most common feature in any stock market bubble is euphoria. And surging AI stocks, led by the 278% rise in Nvidia over the past 12 months, have some arguing that investors are pretty enthusiastic, but Subramanian used some of BofA\u2019s data to push back on that idea.<\/p>\n She noted that U.S. equity investors\u2019 excitement has been \u201cring-fenced\u201d to themes like AI, but overall sentiment is \u201cnowhere near bullish levels of prior market peaks.\u201d In fact, investor sentiment is right around where it was in 1995, according to BofA data. \u201cSentiment is neutral despite pushback we hear that sentiment is \u2018full bull,\u2019\u201d Subramanian wrote.<\/p>\nStocks are overvalued, right?<\/h2>\n
But are investors too euphoric?<\/h2>\n
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