Billionaire investor Warren Buffett is still positive about the prospects of the US stock market, despite concerns of overheating.
Speaking to Bloomberg, Buffett said that while US stocks are expensive, they are a preferable investment to US bonds. While US equities ‘have gotten less attractive as they’ve gone along - they’re still very attractive compared to bonds,’ he said.
When it comes to US bonds, Buffett made the point: ‘You pay 45 times earnings on a 10 year [U.S. Treasury] bond and the earnings aren't going to go up.’
Buffett’s comments come at a time when the S&P 500 is enjoying its second longest rally on record. The index has been on an upward trajectory unabetted since March 2009. According to the Cape measure, which uses price/earnings ratios to determine stock valuations, there are only two other times in history when the market has been this overvalued: before the stock crash of 1929, that set off the Great Depression, and before the Dot Com bubble burst in 1999.
In particular, US markets rallied upon the election of Donald Trump in November. It was hoped that the new president’s promise for a large infrastructure investment programme and a series of tax cuts would be a boon to the US economy. However, tied up with political scandals, the new president has failed to get much of his agenda off the ground. This has raised fears that the confidence among investors that allowed the market rally so much over the past 10 months may soon start to wane.
Buffett, however, appears to remain confident. Of the $100 billion in cash or equivalents his company, Berkshire Hathaway, currently holds, he is looking to invest roughly 80 per cent. However, he noted that the high price of US equities right now meant that choosing where to invest has become harder. ‘Stocks won't earn more just because you pay more for them,’ he said.
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