Two Pathways: Bubble Burst or Bullish Rotation
I wanted to share this chart because it shows the average absolute valuation indicator across each of the 3 groups on either side of the chart above (USA, Large, Growth [ULG] in the blue and Global, Small, Value [GSV] in the blue).
The reason this is interesting is because it highlights on the ULG side that not only is this group trading at expensive relative valuations vs GSV, but they’re also at historically elevated absolute valuation levels — close to levels we saw at the peak of the dot com bubble in 2000 and at the peak of the 2020/21 stimulus frenzy bubble.
This touches on the bearish pathway of how this might resolve… the bearish pathway is that the overvalued and overhyped US/Large/Growth story unravels and that group mean reverts its way down (falling further and faster than the other group).
But let’s also look at the black line and the bullish pathway. The bull path is bullish rotation and catch-up by the much more reasonably priced global/small/value (reasonable absolute valuations and unreasonably cheaply priced relative valuations).
This is why I think this may be one of the most important themes in global equities right now because it touches on the big picture bull vs bear view, the major risks facing investors, and some truly significant relative (and absolute) opportunities.
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