Pimco, one of the world’s largest asset managers, is currently warning of a historically high level of stock valuations. According to the company’s analyses, stocks are more expensive in relation to bonds than they have been in about 25 years. At the same time, high-quality bonds—particularly government bonds—offer attractive yield opportunities, making them increasingly interesting for investors.
Background and Analysis
Current Valuation Situation
Stocks: According to Pimco, the risk premium for US stocks has sunk to a historic low. This means that the expected excess return of stocks over safe bonds is as low as it has rarely been before.
Bonds: High-quality government bonds, on the other hand, offer attractive yields and are considered a relatively safe haven in uncertain times.
Historical Parallels
In the past, similarly low risk premiums have regularly led to significant corrections in the stock markets or a rally in bond yields. A return to “normality” (i.e., a higher risk premium) would typically mean a correction in the stock market or a rise in bond prices.
Causes and Triggers
Political Influencing Factors: Pimco emphasizes the increasing dominance of political decisions over economic developments, particularly in the USA. The traditional world order, in which the economy dictated politics, has, according to Pimco, been “turned on its head.”
Market Psychology and Current Trends: The recent rally in the markets is driven by overreactions, the easing of trade conflicts, and euphoria around AI-driven tech giants. Despite existing risks, there is currently no concrete trigger for an imminent correction, but warning signals are increasing.
Pimco’s Recommendations
- Reallocation: Stronger focus on high-quality bonds rather than highly valued stocks.
- Risk Management: Utilize the yield advantage of high-quality bonds given uncertain market conditions.
- Caution: Maintain readiness for potential market corrections; the next correction could be closer than many believe.
Summary
Currently, stocks are, in Pimco’s assessment, as expensive as they have been in 25 years. High-quality government bonds, on the other hand, offer more attractive yield opportunities than for a long time. Political uncertainties increasingly shape the market environment. Investors should therefore reconsider their portfolios and place greater emphasis on safe fixed-income securities—at least until the relationship between risk and return normalizes again.