“US tech stock correction likely, warn ECB economists,” headlined the Financial Times this week.
Other headlines – “ECB warns that AI boom could lead to global stock market crash” – were more breathless.
Certainly, European Central Bank researchers were far from reassuring, warning in a blog post that “the rise of AI has driven a blistering rally in the tech sector, bringing stock market valuations to levels last seen during the dot-com bubble”.
Before hitting the sell button, however, nervous investors should remember that ECB warnings about dangerously expensive US stocks are nothing new, and in fact predate the AI boom by more than a decade.
In November 2014, the ECB warned that the S&P 500’s cyclically adjusted price-earnings ratio, was 60 per cent above its long-run average, a level surpassed on only “three other occasions in its 188-year history: 1929, 1999 and 2007 (years which preceded significant stock price collapses)”.
Including dividends, the S&P 500 is up 360 per cent since then.
This was no isolated warning. In 2015, the ECB described US valuations as “somewhat stretched”; in 2016, it highlighted high valuations that had historically been “harbingers of impending large corrections”.
In 2018, it referred to “very high valuations by historical standards”. Space prohibits Stocktake from citing warnings in 2019, November 2020 and 2021, but it’s worth noting that valuations “still” appeared “stretched” in November 2022, weeks after a major market bottom.
Every year since then has seen further warnings about stretched valuations, abrupt corrections, concentration and, eventually, the risks posed by AI.
No doubt, most ECB researchers are diligent and bright fellows, but there’s a reason why financial advisers trot out that line about time in the market beating timing the market.
Identifying vulnerabilities is all very well, but there are always vulnerabilities. That is very different from knowing when investors should act on them.
There is also a reason these warnings are so persistent. Financial regulators are there to worry about and highlight what could go wrong – that’s their job. Investors, however, must decide whether the risks are serious enough to justify selling.
After more than a decade of warnings about expensive US stocks, that is still the difficult part.
