BlackRock’s global chief investment strategist, Russ Koesterich, believes there is no bubble.
“The price-to-earnings ratio for the S&P 500 is about 17.5 times, which Koesterich pointed out is a “bit above the average.” But he said, “When you take into account … a low inflation environment and you’ve got a low [interest] rate environment, that’s probably in the right vicinity. It’s a bit stretched, but I don’t think it’s a bubble.”
Fair enough, but there a few things to consider here. First, I am not sure where he is getting his 17.5 number. TTM (trailing) P/E ratio = 20.4 while Shiller’s P/E ratio = 27.5. Shiller’s adjusted P/E is a much better measure. Further, as we have indicated here so many times before, earnings are expected to decline over the next twelve months. Making today’s P/E even more outrageous. Just look at the chart above.
Second, many money managers believe that we must have either a blow off top or be in a massive bubble for a bear market to start. Nothing could be further from the truth. It is not a requirement. In other words, those who anticipate much higher markets based on the premise above, might pay dearly for it.
