US stocks are the most expensive vs. bonds in 20 years - prepare for returns to remain weak for years, strategist says

• With the S&P 500 powering toward all-time highs, US equities are looking pricey by some measures.
• One expert has pointed out that US stocks are now the most expensive versus bonds in 20 years.

US stocks enjoyed a surprisingly buoyant first half, defying recession warnings, as investors took heart from the prospect that the Federal Reserve may be close to ending its interest-rate increases. The hype over AI also proved a strong support for the market, fueling massive gains in mega-cap tech names.

However, a growing chorus of experts are now pointing out that equity valuations are now looking increasingly stretched, raising the risk of a correction.

US stocks are the most expensive in 20 years relative to bonds by one measure, according to one market strategist.

The 12-month earnings yield on US stocks, minus the 10-year government bond yield, is just 1.1%, compared with 5.7% in Europe and 5.2% in the UK, Pictet Asset Management chief strategist Luca Paolini showed in a tweet, using Refinitiv data. That shows equities are overpriced and could hinder future returns.

"After recent rally, US #equities are the most expensive vs #bonds in 20 years. And the #economic outlook also suggests v weak returns in coming years," he said in the tweet.

Paolini isn't the only one who believes the S&P 500 no longer provides value for money.

The price/earnings to growth (PEG) ratio for US stocks - another key equity valuation metric that factors in longer-term future earnings - has "never been higher", Michael Kantrowitz, chief investment strategist at Piper Sandler.

John Hussman, president of the Hussman Investment Trust, is doubling down on his dire outlook for stocks. Stretched equity valuations suggest that the S&P 500 index would be required to plunge of as much as 64% for the market to return to more balanced conditions, according to the asset-bubble expert who successfully predicted the stock routs of 2000 and 2008.

Other investors remain optimistic, however.

Fundstrat's Tom Lee said last week that there are still reasons to be optimistic about the stock market over the next few weeks, even despite the S&P 500's price tag.

"The next 2-3 weeks have positive fundamental catalysts that we believe could positively surprise markets. Thus, the correction path has a somewhat narrow window. Meaning, the weakness could reverse by July 26," he said. "Fundamental drives keep us constructive, even as S&P 500 is overbought."