Is the FTSE 100 in a stock market bubble?

In a bubble, prices rise above and beyond rational levels. Is the FTSE 100 in a stock market bubble? Here’s why James J. McCombie doesn’t think so.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

In a stock market bubble, prices are inflated, fragile, and liable to burst. Investors act irrationally, perhaps manically, and herd together to chase stock prices higher and higher. This is not to say investors buying into a bubble are unintelligent; Sir Issac Newton lost a fortune pilling into the South Sea Bubble in 1720, just before it popped. People seem to get swept up in a mass fear of missing out on the hottest prospect on everyone’s lips.

The early 2000s were notable for the bursting of the dot-com bubble. Companies that added ‘.com’ to their names, and some that did not, were trading at extraordinary prices. This, despite having little revenue and zero earnings. Of course, some companies did go on to eventually deliver much of what was expected in the dot-com boom. However, caught up in the mania, investors associated the Internet with success, with little regard given to the fundamentals of the company the .com was attached to.

Are stock markets in a bubble?

Stock markets have rallied after the Covid-19 crash. Some particularly tech-focused ones are priced higher than they have ever been, seemingly shaking the pandemic completely. Robert Shiller’s cyclically adjusted price-to-earnings (CAPE) ratio takes a stock or index price and divides it by the average earnings over 10 years, adjusted for inflation. The US S&P 500 has a CAPE of around 15–16 on average. Right now, it is at 35. The only time it has been higher was at the heights of the dot-com bubble, when it hit 44.

According to Sibils Research, a data provider, the FTSE 100 has a CAPE of around 14, below its historical average, which suggests it is undervalued. Indeed, the FTSE 100 sits below its pre-crash highs. But before concluding there is a US bubble but not a UK one, I should point out that the FTSE 100 is notable for a lack of tech firms. Many tech-focused firms (think of online delivery and teleconference ones), have grown their current and expected revenues during the pandemic. The S&P 500 has many such firms.

Is the FTSE 100 boiling over?

The FTSE 100, on the other hand, has a fair share of financial and oil stocks. During the pandemic, oil demand slumped and is expected to dwindle as the economy decarbonises. Financial stocks have suffered from a decade of low-interest rates, which worsened during the pandemic. Low rates increase the value of non-financial firms. That might explain the differences between the UK and US indexes completely, but I am not sure.

History may not rhyme, but it does repeat, and some tech stocks’ rapid rise may be premised on little more than calling themselves tech stocks. Furthermore, investors appear to be herding together around common themes once again causing price distortions. 

I do believe some sectors in some markets are frothy and would seek to reduce exposure to them. In a recent Financial Times article, a strategist at Citigroup pointed out that relative to UK bonds, the FTSE 100 looks cheap, and there is the low CAPE ratio to consider. I don’t believe the FTSE 100 is in a bubble. It appears to be a good place to look for opportunities compared to the more exuberant parts of the equities landscape. However, just as not all .com stocks turned out to be winners, not all shares in a cheap-looking index will turn out to be so.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

With a 30% increase since the start of the year, does the Barclays share price still offer good value?

In light of an impressive Barclays share price rally, our writer considers the attractiveness of the bank’s stock relative to…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

How much passive income could we earn from UK shares with just £10 per day?

Even with modest amounts of money to invest, we can still consider investing in the UK stock market to generate…

Read more »

Night Takeoff Of The American Space Shuttle
Investing Articles

3 booming growth shares in the Scottish Mortgage portfolio

Our writer highlights a diverse trio of red-hot shares from the portfolio of Scottish Mortgage Investment Trust. Are any worth…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

2 growth stocks absolutely smashing the FTSE 100

If you think the wider FTSE 100 is having a good year (and it is), check out the gains holders…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

FTSE 100: next stop 10,000?

As the FTSE 100 briefly hits 9,000 points, investors are already looking forward to when the next 1,000-point level might…

Read more »

Investing Articles

Is Burberry ‘back’ as a solid update drives its shares to 17-month highs?

Burberry shares have risen by more than 60% since May's forecast-beating financials. Can the FTSE 250 luxury giant keep rising?

Read more »

Two gay men are walking through a Victorian shopping arcade
Investing Articles

The Burberry share price continues to rise despite falling sales!

Our writer looks at how the Burberry share price responded to the company’s first-quarter trading update, which was released earlier…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

What a crazy day for the share price of this FTSE 250 retailer!

Our writer’s taken time to digest the latest results of the FTSE 250’s Frasers Group. And he likes what he…

Read more »