Has the Growth Bubble Peaked?
Past bubbles and that of the current US ‘Growth’ have tended to be driven by excess liquidity and rising levels of debt, resulting in price levels losing touch with the underlying valuations. As prices and valuations rise, risk premia fall, allowing the narratives that support the rallies to become self-feeding.
The ASR Composite Valuation is now back at levels last seen in January 2000. We estimate US Equity prices have outstripped EPS growth by an historic margin, and debt/GDP ratios are now growing at rates that indicate pre-conditions for a financial crisis. Some believe negative real yields offer support, but there is little protection from a spike in break-evens.
The dramatic outperformance of Banks vs Tech, as well as meltdown of ‘Momentum’ may have already signaled the end of the bubble. If the Fed keeps rates on hold for the next 2-3 years (as the BoJ did in the 1980s), the bubble could be in its early stages. However, this could hamper growth for decades.