Asset Allocation

Wall Street Versus Main Street: Are Stocks in a Bubble?

September 16 2020
Key Insights

  • The stock market seems disconnected from the dire economic environment, but our Head of Global Multi-Asset Sébastien Page does not believe that stocks are in a bubble.
  • Stock prices are based on anticipated earnings—not current conditions—and interest rates have fallen meaningfully, which justifies higher valuations.
  • Unprecedented massive stimulus measures are supporting markets, and in our view the economy seems to be closely following the path of the 2009 recovery. 


The stock market looks divorced from the real economy. Does this mean that stocks are in a bubble? I don’t think so. There is significant pain in the real economy—2020 U.S. GDP expected at -8%, 2020 earnings -23%, unemployment 10%, 20 million people unemployed. How can the stock market be up 55% from the bottom?

The simple answer is that stocks don’t price in current conditions. They anticipate future earnings. Also, we need some perspective on this 55% number. The S&P 500 is only up 6% year-to-date and the Russell Value Index is down 10% year-to-date. Only 38% of the S&P 500 is making new highs relative to pre-pandemic levels. Also the S&P doesn’t represent the entire economy, it represents 500 large companies, some of which have digital business models that have thrived during COVID.

So, I don’t think stocks are in a bubble for four reasons. First, earnings are temporarily depressed, including some companies losing money. Markets are trading off 2021 and beyond earnings. Stocks don’t price off current economic conditions. They price off anticipated conditions and anticipated earnings.

Second, rates have come down 150 basis points, which justifies higher valuations by discounting the cash flows. Third, the size of the stimulus has been unprecedented, representing as much as 40/45% of total world market cap.

If we adjust for the level of rates, we are actually following the path of the 2009 recovery quite closely. There are two stages to a recovery: first, multiples expand because earnings are depressed, and second, earnings renormalize.

By the way, on the disruptors, these are extremely profitable companies with highly scalable business models. There is some speculative buying in the market, but look at the disruptors’ cash flow yield and subtract the risk free rate, and you’ll find that they look fairly cheap—especially relative to the tech bubble of 2000.

So, no we are not in a bubble, stocks are perhaps fully priced. At the moment, we are neutral between stocks and bonds from a tactical six-18 month horizon perspective.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of September 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal.

T. Rowe Price Investment Services, Inc., Distributor.

© 2020 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

Tap to dismiss

Manage Subscriptions

Unsubscribe All

Manage your watched Funds and Insights subscriptions from the mobile menu.

Mobile Watchlist Menu

Manage your watched Funds and Insights subscriptions here.


Change Details

Congratulations! You are now registered.

Begin watching and receiving email updates for:


Sign in to manage your subscriptions and watch list.



Latest Date Range
Download Cancel

This content is restricted for Institutional Investors use only. We were not able to validate your status as an Institutional Investor with the information you provided at registration.

Please contact the T. Rowe Price Team with questions or to revise your status.


You will need to accept the Terms & Conditions again.


You have updated your email address.

An activation email has been sent to your new email address from T. Rowe Price.

Please click on the activation link in order to receive email updates.


You have an existing account

Click OK to view your subscriptions and watch list.


Confirm Cancel