US share markets are trading at or near their record high levels. And while still down from its February highs, the S&P/ASX 200 Index (ASX: XJO) has rebounded 34% from its 23 March low.
With growth stocks leading the charge, some investors are beginning to fear their share prices are unsustainably expensive. While others believe the bull market has much further to run.
Making the bearish case
Andrew Clifford is the chief executive of Platinum Asset Management, a $25 billion global equities manager. While he has nothing against investing in growth shares, he believes most are now overpriced.
As quoted by the Australian Financial Review (AFR) Clifford says:
Everyone recognises this speculative element, but there's huge comfort taken from people from coming back into the FAANGs and Microsoft. I like Microsoft as an example of a company, it's very hard to see the flaw in it, but the valuations today are substantial…
I suspect very much that the extraordinary valuations we're seeing in growth stocks are fundamentally a part of what is in every good bull market: there's a great story, there's too much money and our own human condition goes to work of over-extrapolating just how good these stories are.
While Clifford is forecasting a big share market pullback, he believes that could be some time off yet, and there could be significant share price upside left. "We may be weeks or months away from an end in this mania, it doesn't mean that that doesn't end 20 or 30 per cent higher."
Short-sellers, take note.
Making the bullish case
Jim Paulsen is the chief investment strategist at Leuthold Group. Speaking to a Leuthold Group webinar yesterday, he announced, "I am bullish."
Part of his optimism stems from what he called "divot repair". What he means by that is with the US – along with Australia and most developed nations – mired in coronavirus-induced recession, there are tremendous opportunities ahead for share markets.
Which is not to say he forecasts markets will head higher in a straight line. Paulsen says, (as quoted by the AFR):
Expect corrections. We're definitely going to get more than one of those and they will be scary when they occur. … (However) Stocks react not to levels, they react to change in activity and there's huge possibilities to have positive change in economic activity if only because things are so bad right now.
As for continuing impacts from the coronavirus?
"I think we're much better prepared even if COVID-19 continues well into next year," Paulsen said.
Foolish takeaway
Governments across the developed world are pouring trillions of stimulus dollars into their economies to offset the drag from coronavirus mitigation measures. Atop that, interest rates are forecast to remain at record lows not just in 2020, but beyond.
Yesterday US Federal Reserve chair Jerome Powell even distanced the Fed from its 2% inflation annual target, saying that 2% would be effective over a period of time. Since US inflation has been below 2% for years, that means the Fed is now happy to see higher inflation without hiking rates.
And low rates along with record government stimulus means more money heading into the share market.
Not every company is going to shoot the lights out like ASX 200 darlings Afterpay Ltd (ASX: APT), whose share price is up 203% over the past 12 months, or Mesoblast limited's (ASX: MSB) share price gain of 252% over 12 months.
But some might. And I believe the majority will likely deliver significantly more share price returns than Australian investors will find in the cash or bond markets over the next year.
