Stocks are nowhere near dot-com bubble levels and earnings justify current valuations, Deutsche Bank’s US stock chief says

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Traders work on the main trading floor of the New York Stock Exchange March 21, 2007.

Stock valuations today are nowhere near levels seen in the late 1990s dot-com era, said Deutsche Bank’s Binky Chadha.

In a Tuesday webinar, the bank’s chief US equity strategist said that stock valuations are “unambiguously high” on multiple metrics, but levels seem justified given where we are in the recovery cycle.

Chadha said his clients ask whether equities are in a bubble almost “every day.” Investor fears that the stock market is in bubble have grown as the S&P 500 continues to make new records, though many strategists have tried to quell those concerns.

Goldman Sachs recently conducted a study that looked back at over 300 years of market data and concluded that while some characteristics of a stock market bubble are indeed present, a full-fledged bubble has not yet formed, and high stock prices are justified by historically low interest rates.

According to Chadha, equity valuations are always high at this point in a recovery cycle, and earnings have been very strong. During the dot-com era, measurements of overvaluation were much higher relative to now, and the overvaluation occurred much later in the cycle.

He also explained that valuations are high, not because of over exuberance but because of the involvement of retail investors during the pandemic. But as the COVID-19 crisis begins to wind down, that level of retail participation should also come down.

The strategist reiterated his viewpoint that the S&P 500 is likely to pull back up to 10% in the near-term as economic growth peaks.

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Stocks could pull back 10% in the second quarter when stimulus-fueled growth peaks, Deutsche Bank’s chief strategist says

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A trader works on the floor at the New York Stock Exchange (NYSE) in New York, U.S., February 28, 2020.

  • Stocks could pull back as much as 10% in the second quarter, Deutsche Bank said.
  • The pullback will be prompted by a peak in economic growth and a downturn in retail investor inflows as people return to their pre-pandemic routines.
  • In the near-term, Deutsche Bank sees stocks continuing to gain.
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Deutsche Bank’s chief global strategist expects stocks to pull back as much as 10% in the second quarter of 2021 as economic growth peaks.

In a Friday note a team of strategists led by Binky Chadha said they expect a “significant market consolidation” between 5%-10% sometime in the second quarter.

“The more front-loaded the impact of the stimulus, and the direct stimulus checks at around a quarter of the new package clearly are one off, the sharper the peak in growth is likely to be,” the strategists said. “The closer this peak in macro growth is to warmer weather (giving retail investors something else to do); and to an increased return to work at the office, the larger we expect the pullback to be.”

In the nearer term, Deutsche Bank expects stocks to continue to go up as investors pile into stocks with new stimulus money. On Monday morning the Dow Jones hit a record high, buoyed by optimism for strong economic growth following President Biden signing the $1.9 trillion stimulus program into law last week.

The strategists also raised their year-end S&P 500 price target to 4100, up from 3950 previously, because they see stocks rallying back after the second quarter pullback. That gives the benchmark index nearly 4% upside from current levels.

But investors should be selective about stocks they choose against this backdrop. Deutsche Bank’s top sectors are energy and financials, while industrials, materials, and cyclical consumers received a “neutral” rating, because these groups have already priced in strong macro growth after outperforming since November.

Meanwhile, returns on mega-cap growth stocks and technology names are likely to remain flat throughout the year, Deutsche Bank added.

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