ECB's Decade-Long Warning About US Stocks Falls on Deaf Ears

The European Central Bank (ECB) has been warning about overvalued US stocks for more than a decade, but investors are still deciding whether to act on those warnings.

In November 2014, ECB researchers noted that the S&P 500's cyclically adjusted price-earnings ratio was 60% above its long-run average, surpassing levels seen only three other times in history: 1929, 1999, and 2007, which preceded significant stock price collapses.

The warning was not an isolated incident. In subsequent years, the ECB repeatedly highlighted high valuations that had historically been harbingers of impending large corrections. In 2015, it described US valuations as 'somewhat stretched', while in 2016, it pointed to high valuations that had previously led to significant stock price declines.

The ECB continued to sound the alarm in subsequent years. In 2018, it referred to 'very high valuations by historical standards', and in 2022, noted that US valuations were still stretched after a major market bottom.

No matter how many warnings are issued, investors must weigh the risks against potential returns. As one researcher noted, identifying vulnerabilities is one thing, but knowing when to act on them is quite another.