Market Extra: Permabear Albert Edwards warns stocks are as bloated as bitcoin
It takes guts to be a doomsayer when the majority is caught up in the euphoria of one of the most powerful stock market rallies in years. Yet, that has not deterred Albert Edwards, global strategist at Société Générale, from warning of a massive bubble in U.S. equities and likening it to the controversial bitcoin mania.
A bubble, according to the self-professed uber bear, can be detected by the relentless rise in prices that typically drowns out warnings from doubters.
“That is something the main S&P Composite Index certainly shares with bitcoin,” said Edwards in a report Thursday.
The strategist noted that sentiment has not been this exuberant since the days leading up to the 1987 market crash and the S&P 500 SPX, -0.41% is the most overbought since 1995. Yet, he says, investors remain oblivious because of all the focus on bitcoin.
The S&P 500 has surged 19% this year, putting it on track for its best performance since 2013, as investors continued to bid prices higher on expectations of pro-business policies from President Donald Trump, including tax policy changes. Bitcoin BTCUSD, +0.53% has also skyrocketed, soaring over 1,600% as speculation on the back of ample liquidity fueled the rise of cryptocurrencies.
“One justification for the surge in stocks is a profits recovery. But the underlying profits recovery looks increasingly fragile and indeed on some key measures a rapid deceleration is underway,” he said.
Edwards believes despite the positive data, the economy is not as robust, nor are corporate profits as impressive, as the headlines suggest. That’s true, he says, even as profitability has bounced back from 2015 lows and is rising around 10% a year, in line with the growth in national income accounts.
“Yet scratch the surface and all is not well. Looking at only domestic, non-financial companies—i.e. companies selling in the U.S.—profits have barely rebounded on an economic basis,” he said.
The strategist argues that domestic economic gains rather than overall national profits are what drive corporate investment. In his view, the domestic economy, excluding exports and earnings from foreign subsidiaries, has been mostly anemic.
Edwards may have a point.
S&P 500 companies with higher global exposure posted earnings growth of 13.4% in the third quarter versus 2.3% for companies that generate most of their sales inside the U.S., according to FactSet.
Furthermore, much of domestic growth has been on the back of a recovery in oil prices. If energy is excluded, profits after 2015 have actually decelerated, Edwards claims.
“And in an overvalued, overbullish and overbought market, this profits deceleration might yet prove to be highly significant,” he said.
Edwards plays his bearish role to the hilt and in recent years has expressed repeated concerns about the U.S. stock market, forecasting that the S&P 500 could plunge to a two decade low. So far, that grim prophecy has been thwarted as stocks extended their record-setting streak.
U.S. stocks took a breather Thursday from its recent record-breaking run, while bitcoin is down more than 1% to $ 16,523.