Pimco warns of overvalued stocks
Pimco, one of the world’s leading asset managers, is concerned that equity valuations are as high compared to bonds as they were 25 years ago. This trend poses risks since the Equity Risk Premium, or the yield premium of stocks over safe government bonds, is nearly zero. Such phases have historically been precursors to market corrections.
Historical CAPE values
According to Pimco, the cyclically adjusted price-to-earnings ratios (CAPE) are also at historically high levels. Since 1950, US stocks have only been valued higher in six percent of all cases compared to today.
Attractive Opportunities in Bonds
In contrast, high-quality government bonds currently offer attractive yield opportunities, according to Pimco. In light of geopolitical uncertainties, Pimco recommends orienting portfolios towards such fixed-income securities to capitalize on the current opportunities.
Shift to Fixed-Income Investments
Pimco advises not to get swept away by overvalued stocks but to increasingly focus on bonds. This is especially important given expected political upheavals, such as those anticipated with President Trump’s second term.
Political Factors Influence the Markets
According to Richard Clarida of Pimco, the traditional world order has shifted in favor of politically dominated economic developments. This dynamic increases risks in the capital markets, so a more resilient portfolio alignment is recommended.
Conclusion
Pimco sees significant overvaluation risks in stocks and recommends a stronger focus on high-quality bonds. This is driven not only by the high valuation of stocks but also by geopolitical influences and the growing impact of political decisions on economic developments worldwide.