An expert who called the dotcom crash says Wall Street is recycling tech-bubble tactics to justify the record-shattering stock rally - and warns it's an 'accident waiting to happen'

GettyImages/ JOHANNES EISELE

• Society Generale global strategist Albert Edwards says today's combination of surging stock prices and sluggish growth has created shaky valuations reminiscent of the tech bubble two decades ago.
• He says that, over the last year, investors have made a big bet on faster economic growth and stronger profit growth - but there's little evidence their confidence will be justified.
• Edwards says analysts appear to be reverse-engineering their profit estimates so they can keep "buy" ratings on some stocks, and explains that this questionable practice also preceded the dot com bust.
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Stocks have been on a phenomenal run since last spring, but the spectre of the late 1990s and early 2000s tech bubble still keeps Wall Street veterans up at night.

Societe Generale global strategist Albert Edwards - who foresaw that painful crash - says he thinks some of the worst excesses of that time are being repeated today.

While stocks are at record highs after rallying 29% in 2019, Edwards says there are big warning signs. For one, the increase in stock prices has been much more dramatic than the growth in company profits, as earnings for US companies hardly grew last year.

Global economic growth remains sluggish as well, which only makes it harder for companies to improve their profits.

"Investors have bet that weak economic and profits data is a mid-cycle pause," Edwards wrote in a recent note to clients. "The market has placed a very big bet on recovery."

The combination of rising prices and mediocre growth is creating historically high valuations. Edwards notes that a version of this threatening scenario played out a few years ago: price-to-earnings growth ratios rose to all-time highs in 2016 and were reset by the dramatically market selloff at the end of 2018. But now, PEG ratios are even higher.

That means that if a recovery in growth and profits doesn't materialize, it will make it clear that stock prices are unreasonably high, and in his view, "the equity market is a valuation accident waiting to happen."

From there, Edwards says he sees some other factors that echo the errors of the dot com boom and its accompanying bust. One is that market multiples have grown dramatically because of easy money. Another is that, to Edwards, Wall Street is playing numbers games again.

"Analysts in the late 1990s were simply driving up [long term] eps forecasts to reverse engineer their discounted cash flow models so as to justify maintaining their Buy recommendations," he said.

He says the same thing is to be happening now, as analysts are making more optimistic profit projections in spite of the obstacles to growth described earlier. That suggests the market's support isn't based on solid reasoning and ultimately isn't as strong as it looks.

"If the economic cycle and bull market has been running for a long while, it is no surprise that analysts will extrapolate the past into the future and become more bullish about the future longterm prospects for the companies they cover," Edwards wrote.

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