The U.S. stock market is currently experiencing a period of high valuations, but analysts at TS Lombard are quick to point out that this doesn’t necessarily mean we’re in a bubble. One key factor that has been present at previous bubble peaks is missing this time around: leverage.
Despite the frothy appearance of the stock market, margin debt has not increased significantly since the end of the bear market in October 2022. In fact, the amount of margin debt relative to the market capitalization of the S&P 500 has actually decreased as stocks have risen.
While valuations for technology, financial, and healthcare stocks are high compared to historical averages, strong earnings growth from market leaders like Nvidia Corp. and others has helped support these high multiples. The concentration of market capitalization in a few key companies has also increased, with the top 10 companies now comprising over 30% of the MSCI USA Index.
However, there are signs of improvement beneath the surface. The breadth of the market has started to improve, with a large percentage of S&P 500 companies trading above their 200-day moving average. Despite concerns about elevated options trading, TS Lombard argues that the volume of call options traded remains below levels seen during the market froth of 2020.
On Wednesday, U.S. stocks rebounded following a tech-led selloff the day before. The S&P 500 was up 0.4% at 5,100, the Nasdaq Composite rose 0.6% to 16,033, and the Dow Jones Industrial Average increased by 0.1% to 38,625.
Overall, while valuations are high, strong earnings growth and a relative lack of leverage suggest that the stock market may not be in a bubble just yet. Investors will be keeping a close eye on earnings reports and market breadth to gauge the sustainability of the current market rally.
