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‘Valuations are just too high’: David Rosenberg sees risks in U.S. equites

David Rosenberg, founder and president of Rosenberg Research has a bearish call on the equity markets as he says a huge headwind could impact certain future ret

Veteran Bay Street economist David Rosenberg says equity markets are facing a rare situation where valuations are too high amid concentration risks.

Rosenberg, the founder and president of Rosenberg Research, said in an interview with BNN Bloomberg Tuesday that the current state of the stock market is not exactly a “once in a lifetime” event but maybe a “twice in a lifetime event.” He added that valuations are not a great way to time the market, but are either a headwind or a tailwind, and are currently a big headwind for the market when it comes to expected future returns.

“We have a situation where the multiple in the S&P 500 is now a 2.3 standard deviation event, and we’ve only been this expensive on the S&P 500 in 1929, in 1999, and we were there briefly back in late 2021. Both foreshadowed pretty rough years for the market that nobody saw coming because the tendency for investors, well for everybody, is to always extrapolate the most recent experience into the future,” he said.

According to Rosenberg, the market is anticipating 20 per cent average annual earnings growth over the the next five years in the S&P 500 Index based on what is currently priced in.

“That’s almost triple the historical norm. If you believe that’s going to happen, if you believe that AI is going to drive productivity that (much) higher and business costs that much lower, that we’re going to get 20 per cent earnings growth in the next five years, then I would suggest this market is for you, not for me, maybe it is for you. Valuations are just too high for my liking,” he said.

Rosenberg said he also sees concentration risks in the market, adding that we currently have the “same degree of concentration” in mega cap and technology stocks that were present in the late 1990s. However today, he added households in the U.S. have allocated over 70 per cent of their financial assets in the equity markets.

“And 60 per cent of that almost is in ETFs (exchange-traded funds), passive index funds. So, you have a record degree of concentration in the stock market, coupled with record degree of concentration (of) household balance sheets and risk,” he said.

Given the current circumstances, Rosenberg said he likes the U.S. bond market as well as Canadian stocks.

“We’ve had a dramatic tightening of financial conditions, and so I think that the bond market, having already corrected, is looking very attractive. If we approach five per cent of the 10-year treasury note, I think that’s going to be a very attractive entry point. We may already be there right now. I’d say that the five-year part of the treasury curve looks to me to be the most attractive,” he said.

Rosenberg highlighted the Canadian stock market doesn’t face the same obstacles as the U.S. regarding valuations.

“The valuations here are actually compelling, both absolute and relative, and you pick up a very nice dividend yield where you don’t get that in the United States. So, I’m much more bullish or let’s just say a lot less bearish on Canada than I am in the U.S. right now,” he said.