The US stock market is at its most overvalued ever on some closely watched measures as Wall Street continues to rise despite the global downturn.
The average S&P 500 stock is trading at record high valuations factoring in profits, surpassing levels seen during the dotcom bubble on some measures, according to Bank of America.
Investors warned that US stocks “cannot defy economic gravity indefinitely” after the wave of central bank stimulus triggered a remarkable turnaround on markets.
The Wall Street bank found that the S&P 500 is well above average levels on the vast majority of indicators watched by investors.
While many measures still put stock prices below the frothy valuations reached during the dotcom bubble in the late 1990s and early 2000s, some have pushed past those levels to record highs.
“Stocks are trading above average on all but two of the 18 measures we track - most notably, the forward price/earnings to growth is at record highs and the median forward price to earnings is in-line with the prior record,” said Savita Subramanian, Bank of America strategist.
The S&P 500 has recovered all of its 2020 losses despite US GDP plunging 33pc on an annualised basis in the second quarter.
Since the low hit in March as US stocks fell into a bear market at a record pace, the index has gained 44pc. Indices have Europe have struggled to keep pace with the FTSE 100 rebounding 18pc.
Andrew McCaffery, global chief investment officer for asset management at Fidelity International, warned markets “cannot defy economic gravity indefinitely”.
“As more bleak economic data emerges, we think markets are nearing their limits without further stimulus and a much stronger recovery,” he said.
Mr McCaffery predicted that stocks could be rocked by “renewed volatility” in the third quarter after the recent surge.
Market watchers have argued the remarkable rally has been driven by the huge support provided to the economy by central banks as they have fired up the printing presses again to buy huge amounts of bonds under their quantitative easing programmes.
Bank of America estimates that global stimulus by central banks and governments amounts to more than $20 trillion, including $8.5 trillion of monetary support.
Stock gains have stalled as the US Federal Reserve has slowed its purchases under the quantitative easing programme, noted analysts at Barclays. They added that more QE could be needed for stocks to extend their rebound.
Last week the Fed warned that the US recovery was faltering as rising infections force states to reverse reopenings and consumers turn cautious.
“We have seen some signs in recent weeks that the increase in virus cases and the renewed measures to control it are starting to weigh on economic activity,” said Jerome Powell, Fed chair.
He promised to do “what we can for as long as it takes to provide some relief and stability”.