In a flashing red warning, share valuations have soared to their second-highest ever level, suggesting that many stock investments are over-bought and could be in bubble territory.
The only other time indicators were at this level was before the dot com crash at the turn of the millennium.
Experts are now worried that history is about to repeat itself.
It comes after stock markets in both the US and Britain have continually topped their highest ever levels in recent months.
American’s top stock indices the Dow Jones and S&P 500 are up a staggering 20 per cent and 16 per cent respectively over the past 12 months, while Britain’s FTSE 100 has surged as much as 15 per cent over the past 12 months.
If companies are in good health and profits are growing, soaring share prices may be justified.
But one method of assessing share values, the Shiller PE (Price to Earnings) ratio on average inflation-adjusted earnings from the previous 10 years, suggests that stocks are very expensive.
In the above chart this level is at its highest since the Dot Com bubble burst in 2000 and stock markets crashed.
Another measure of stock health, also suggests the picture may not be as rosy as soaring indices suggest.
Dividend cover for UK’s largest listed companies, a measure of how sustainable share payouts are, is at its lowest level since 2009, according to new analysis by The Share Centre.
The research shows companies have continued to increase dividends, keeping investors happy, but failed to grow profits at the bottom line.
Nevertheless markets appear to remain positive – at least for now.
This is largely because of the actions by central banks on both sides of the Atlantic.
Policymakers have pumped money into the economy through so-called Quantitative Easing and kept interest rates low, which has helped fuel stock market growth.
JH&P investment manager James Horniman said: “Price earnings ratios, though a crude measure of market valuations, are at the high end in many countries.
“However, monetary policy is still supportive of equities, the economic data coming through is better and we have seen positive earnings revisions, which should improve support for many stocks.
“Quantitative easing has pushed bonds into bubble territory and squeezed yields to levels that are unsustainable.
“That is driving investors into equities and further supporting equity markets.
“We do see pockets of irrational exuberance and the market failure to react to the general election result makes us concerned that they are becoming desensitised to political shocks, but we think this bull market has longer to run.”
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