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US stock rally drives ‘ludicrous index’ towards dotcom era heights

This article is part of the FT’s Runaway Markets series.

Booming stock prices have inflated one measure of Wall Street exuberance back towards levels seen just before the dotcom bubble burst more than two decades ago.

Shares in 79 companies listed on US stock exchanges have more than doubled in the past three months. These companies — all worth more than $500m — trade at a price-to-sales ratio higher than 10, more than three times the ratio across the benchmark S&P 500 index.

Between 2011 and the start of the sell-off in March that preceded the market rally, that figure only ever crept as high as 13. At the height of the dotcom mania in 2000, 120 companies shared the same characteristics, according to Bespoke Investment Group.

The rise in Bespoke’s “ludicrous index” coincides with rising concern among some investors over what they see as frothy conditions in the world’s biggest equities market. The S&P 500 has soared 75 per cent from its March low even as the country battles through successive surges in coronavirus and an uneven economic recovery.

Well-known investors including Jeremy Grantham have warned that a bubble is brewing in US markets, as stocks race higher and listings of blank-cheque companies, or Spacs, boom.

David Kostin, chief US equity strategist at Goldman Sachs, said on Friday that one of the most frequent questions asked by clients of the Wall Street bank is whether US stocks are trading in “bubble” territory.

He said that while the overall market appears to be “reasonably” valued, “pockets of the market have recently demonstrated investor behaviour consistent with bubble-like sentiment”.

The list of highly valued companies that have ascended into Bespoke’s ludicrous index include Farfetch, the $21bn online luxury goods retailer, and Nio, the $97bn Chinese electric vehicle maker that is expected to report a loss of $769m this year on $2.5bn of revenues. Tesla, which has rallied 99 per cent over the past three months, does not make the cut.

Runaway Markets

In a series of articles, the FT examines the exuberant start to 2021 across global financial markets

Investors have justified the valuations on many fast-growing companies on rock-bottom interest rates, including negative real yields in much of the developed world. Those negative yields have made the prospect of far-off profits more appealing than they would be if interest rates were higher than where they are today.

Howard Marks, the high-profile distressed debt investor, recently told clients that the equations often used to value companies “were not built to handle high-double-digit growth as far as the eye can see, making the valuation of rapid growers a complicated matter.”

Alex Ely, Macquarie Investment Management’s chief investment officer for US growth equities, added that price-to-sales metrics have for years been the way to value faster-growing companies.

“If you use price-to-earnings [ratios] as your only metric you would never have owned Microsoft or Amazon over the last 30 years,” he said. “P/E is a dated metric. This has happened before in history, back in the 40s and 50s book-to-bill was the only thing you used to value a company . . . and then we moved to P/E in the 80s and 90s.”


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