Investors Can't Stop Dancing

The bull is calling the tune, but prices are high and some pros are getting anxious about what will happen when the music stops

If the year 2020 wasn’t weird enough already, add this to the list: The U.S. is in the middle of a recession, yet some professional investors are worried that the stock market may be rallying itself right into a bubble.

While most Americans are still trying to avoid crowds to stem the spread of the coronavirus, investors are crowding tightly into shares of tech inflected companies believed to have the least at risk from the economic disaster. To buy into the U.S. stock market right now means paying about $23 for every dollar of earnings from companies in the S&P 500, the most in a decade. The Nasdaq 100 Index’s valuation, at 34 times earnings, is the highest it’s been in more than 15 years. These numbers are unusually skewed to the biggest names, which investors have piled into. The five largest U.S. stocks—Apple, Microsoft, Amazon, Google parent Alphabet, and Facebook—now account for almost a quarter of the total market value of the S&P 500, compared with about 12% in 2015.

The cheapest price-earnings ratio among the Big Five is about 30. At 37, Microsoft Corp.’s is the highest since the euphoric dot-com heyday 20 years ago. That said, a few other names have also taken part in the boom. Tesla Inc., not yet in the S&P 500, is trading at 10,000 times earnings.

These valuations are all based on the earnings that have already been reported. Investors are willing to pay this much because they assume future earnings will be better. But when it comes to the market as a whole, future earnings are anybody’s guess, because a record number of companies have decided the outlook is too uncertain for them to provide investors with profit forecasts.