U.S. stocks have surprised many on Wall Street this year with a strong rally that defied decades of high interest rates and calls for a recession. Slowing inflation and hype about artificial intelligence have fueled the rally.
But some time ago, the Fed's unwavering long-term rate hike stance and the deepening rout in the bond market dealt a fatal blow to the US stock market, with the S&amp 500 index (S& P 500) gave up gains since the start of the year. But with the outbreak of the Israeli-Palestinian conflict, the Federal Reserve has softened its stance recently, and the U.S. stock market has successfully achieved a fourth straight positive performance this week.
In fact, according to research, equity valuations look increasingly expensive, which increases the risk of a market correction. One indicator in particular is flashing red - the relative valuations of equity and bond markets.
In August, the S&P 500 climbed to levels last seen at the height of the dot-com bubble, relative to an index that tracks the US corporate bond market, according to Koyfin, a global analytics platform. Despite the recent pullback in stocks, the indicator remains near highs.
The last time the indicator was this high was in the spring of 2000, which was followed by a multi-year stock market crash that saw the S&P 500 plunge 50 percent between March 2000 and October 2002.
Another indicator of how expensive stocks are relative to bonds is the so-called equity risk premium, or the extra return on stocks relative to government debt, which is considered a safer form of investment. The measure has fallen to multi-decade lows this year, indicating rising stock market valuations.
The equity risk premium is near its lowest level since 1927. Research firm MacroEdge recently analyzed that "on each of the six occasions this has happened, the market has experienced a major correction and recession/depression - 1929, 1969, 1999, 2007, 2018 and now."
Many market experts have expressed similar sentiments. "Stocks have become more expensive relative to bonds," said Roth MKM analyst Michael Darda.
Billionaire investor Jeffrey Gundlach said last month that stock prices are too high and a recession could hit the U.S. economy in the next three quarters or so.
"I think the market is overvalued. It's hard to like stocks when the risk premium is at a 17-year low." 'he said.