Ultra-large-cap stocks are overvalued and at risk of a sharp correction, according to a CIO. Here’s why this presents a “monstrous”

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  • Stock market leaders are overvalued and could face a sharp correction, the RBA’s Richard Bernstein said.

  • The losses could rival the crash of Internet companies, when popular stocks lost up to 50% of their value, he predicted.

  • But the event could be a great investment opportunity as the gains are distributed to the rest of the market.

The most expensive stocks are poised for a sharp correction, but that could present a “monster” buying opportunity in almost every other area of ​​the market, according to Wall Street veteran Richard Bernstein.

The RBA’s chief investment officer has highlighted a gap between the debt and equity markets, which could point to something happening soon. market correction. In the debt market, credit spreads narrow, which typically happens when corporate profits rise. But only one restricted group of titles dominate the stock market, implying that profits are not growing for most companies.

Several elements could explain this disconnection. The bond market could send a false signal, implying that there could be a credit event and a wave of corporate bankruptcies on the horizon, Bernstein said.

However, the most likely explanation is that the more expensive stocks on the market are vastly overvalued and are headed for a correction, while the bond market signals increasing strength for the rest of the companies that make up the S&P 500.

“Basically, it makes no sense. The bond market is saying that corporate earnings are going to be strong…but the stock market, with this incredibly small leadership of seven companies, is saying that these are apocalyptic earnings prospects,” he said. he told Business Insider in an interview. . “I think the the stock market is in a bubble and the bond market is right.”

Stocks have been flashing other warning signs that investors are too caught up in speculative fervor for a handful of names. The top 10 stocks in the S&P 500 account for 35% of the benchmark index’s total value, the highest percentage ever, according to Apollo’s analysis.

The top 10 stocks in the S&P 500 account for a record share of the benchmark index, according to Apollo.Bloomberg/Apollo

And if we compare the market cap of the largest stock in the market to the 75th percentile of stocks, the market appears to be the most overvalued since 1932, according to Goldman Sachs economists.

The market’s largest stock, compared to the 75th percentile stock, is the most expensive since the 1930s.Goldman Sachs Research

Bernstein had no prediction for when the bubble might burst, but it could inflict serious “damage” on the economy, with losses in stocks rivaling those in the economy. dot-com crashhe warned.

After the boom in Internet stocks, the Nasdaq Composite Index fell 78% from its peak, and technology stocks continued to struggle over the next 14 years. This paved the way for a “lost decade” on the stock market, the S&P 500 losing 1% from 1999 to 2009.

“That’s what I think we’re looking at,” Bernstein said…

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