Analysts have assigned a 35% probability to the potential emergence of a stock market bubble, particularly in light of rising bond yields. A bubble could develop if specific conditions are met, especially in high-value sectors such as technology.
Historically, the price-to-earnings (P/E) ratio in these bubble-prone areas reaches at least 45x when bond yields reach 5.5%. Currently, the P/E ratio for the leading tech stocks stands at 34x. There is an emphasis on the robust state of corporate balance sheets, particularly within the tech sector, which may support high valuations despite increasing yields.
Caution is advised regarding non-financial cyclicals, which are trading at near-record P/E and price-to-sales (P/S) ratios compared to defensive stocks. Instead, a preference is indicated for defensive stocks with low financial leverage, with recommendations for companies such as:
- Microsoft
- Abbott
- SAP
- Tesco
- BAE Systems
For investors concerned about potential populist policies or inflation, a long position in financials is suggested as a hedge against populism. European banks and life insurance stocks are expected to benefit from rising inflation expectations. Additionally, insights on regional performance under rising Treasury Inflation-Protected Securities yields indicate that Japan has historically outperformed in local currency terms, while emerging markets with high current account deficits, such as Brazil, tend to lag in dollar terms.
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