‘Irrational Exuberance’ and Market Timing

Eran Peleg, CIO November 21, 2017

With S&P 500 trailing price-earnings multiple around 20x (on an operating EPS basis. On a reported GAAP basis, it is around 24x), equity market valuations are around the levels witnessed when US Federal Reserve Board Chairman, Alan Greenspan, made his famous ‘Irrational Exuberance’ speech during the late 1990s tech bubble.

Equity valuations, especially in the US, are fairly high. However, it is worth noting that as far as ‘exuberance’ warnings are concerned, these tend to be fairly bad market-timing indicators. Greenspan, for example, made his comments in December 1996, while the S&P 500 equity index peaked only in 2000 – more than 3 years later. In the interim, the S&P 500 was up 100% (the index level went from around 750 to 1,500). By the way, at the 2000 bubble peak, the S&P 500 price-earnings ratio hit 30x.

That is not to say that one should be complacent. It is important to monitor any signs of financial overheating in global markets – and there are some. We are watching closely.