Heinz Zimmermann, Professor of Financial Market Theory, University of Basel:

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The U.S. equity market is highly valued, yet its sector structure remains attractive even from a European perspective, despite currency effects. The high valuation is not mainly visible in the market’s overall P/E ratio of 22, or in forward earnings expectations, which are elevated but not excessive.

What stands out are the far higher multiples in the growth sector relative to actual earnings, suggesting expectations significantly outpace realized results.

«Those wishing to avoid this risk should gradually reduce U.S. equity exposure or focus on defensively valued stocks.»

It is also often overlooked that the market trades at five times book value. To justify such valuations, sustainable returns on equity of more than 20 percent – and over 30 percent in the growth sector – would be required.

Long-term investors should not be alarmed by this alone. Losses following the dot-com crash would have been largely recouped within a few years had they not been compounded by the subsequent financial crisis.

A similar situation applies today: the danger lies not only in euphoric earnings expectations but in the fragility of valuations that have been inflated by rate cuts and historically low risk and credit premiums. A reversal in these trends could accelerate any market downturn.

Those wishing to avoid this risk should gradually reduce U.S. equity exposure or focus on defensively valued stocks. This is not feasible with passive investments but requires active stock selection.

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