Market noise over a bubble in equity valuations is overblown, according to T. Rowe Price.
Portfolio specialist Laurence Taylor says as the familiar battle between equity market bulls and bears heats up amid the second-longest bull market in history threatening commentary that a bubble forming is gaining premature traction.
He says while valuations are not currently cheap, broadly, nor are they excessive.
Rather he believes global market – both developed and emerging – equity valuations appear average compared with the past 20 years.
He draws the comparison with a ‘proper’ bubble – that seen during the tech boom/bust of 1997-2000, explaining how this is skewing average valuations upward.
Taylor explains how economic indicators have been rising steadily since their lows of 2016, led by upside surprise in manufacturing and service PMIs, while earnings revisions continue to move in the right direction.
“This was our core scenario despite the pessimism early last year, and in many respects, the data has been better than our own expectations,” he says.
Modest inflation between 1-4% is traditionally associated with higher US equity valuations because such periods generally coincide with the economy performing well.
“Often the key to success in mature bull market periods is resisting the temptation to be too bearish, too soon, as long as the improvement phase is real and valuations are not unrealistically high.
“We see enough improvement to maintain optimism that the equity cycle can deliver positive returns, even from this current valuation starting point. Policy missteps and market pull-backs are almost inevitable, however, certainly as we extend our time horizon.
“What remains true is that key to success over a cycle is the ability to differentiate between stocks in both good and bad times, but particularly to make sound decisions when renewed valuation opportunities emerge. On this point, the bears will have their day, but we do not believe that it is today, and we certainly do not believe that equities embody a valuation bubble looking at current data.”