Double-Digit US Stock Returns Are in the Past, Bubble or Not

There’s a lot of bubble talk around US stocks.

The market has been on fire in recent years. The S&P 500 Index has more than doubled in value since bottoming in March 2020 on Covid fears. It’s also up 14% a year since 2010, including dividends, nearly 5 percentage points a year better than its long-term annual return.

No wonder investors are throwing around the B word.

But is this a bubble? It’s hard to say objectively because the word means different things to different people. One way to size up this market is to compare it to an undeniable bubble, namely the dot-com craze of the late 1990s, which remains by many measures the most expensive US stock market on record.

By that standard, the good news is that this market isn’t as frothy. The bad news is that it’s uncomfortably close, which is likely to be a drag on stock returns in the coming years.
blowing bubbles

First, the good news. Whatever one’s preferred measure of earnings, this market is cheaper than it was at the dot-com peak. The S&P 500 trades at 22 times forward one-year earnings, compared with 30 times in December 1999. It trades at 25 times last year’s earnings, compared with 30 times in 1999. And based on so-called cyclically adjusted earnings, or the average inflation-adjusted earnings over the prior 10 years, it trades at 33 times, compared with 38 times near the dot-com peak.