Markets

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

Even if you're of the opinion that the bull market in U.S. stocks is in the "late innings," there's one thing that most baseball fans will agree on: The late innings are often the most exciting part of the game. 

So the fact that valuations are at their highest point in this bull-market cycle, and among the highest levels ever seen historically, may not matter much if exuberance is the trading strategy du jour; valuations could swell higher and send stocks to levels very few believe are rational or justified by growth expectations that may or may not be reliable. 

How High Will It Go?
U.S. stock valuations are high but have been known to go even higher as fear of missing out takes over
Source: Bloomberg data; valuation at past peaks from UBS

Of course, sentiment could change abruptly if buying is motivated by fear of missing out rather than confidence in the fundamentals. It's a dangerous game, for sure, one that strategist Nick Colas at Convergex has compared to "the proverbial trader’s dilemma of running in front of a bulldozer to pick up a few nickels."

On the other hand: Hey, look at those shiny nickels! 

So even if you believe the current advance in stocks is simply a "melt-up" or a "FOMO" rally, that may not be a very good reason to avoid riding it for however long it lasts. How long could that be? Who knows. I'd be tempted to let those nickels lie on the ground for now, but that's why I write about stocks rather than trade them. 

For the rest of you daredevils,  a note out on Wednesday from Julian Emanuel at UBS dangles the possibility of a jump in the S&P 500 to 2,350 or even 2,500. That would be a whopping 8.6 percent or 16 percent advance, respectively, from the close on Tuesday. The lower level implies a valuation of 19.7 times Emanuel's 2016 earnings estimate of $119 a share, which by his math would match the average valuation at market peaks over the last 60 years. 

One thing clouding the picture is fund flows. While huge inflows into mutual funds from retail investors preceded the peak of the dot-com bubble, the same cannot be said now, though they did perk up after the Brexit angst faded. However, the shift in taste to passive, index-based mutual funds and ETFs may mean those are the places to watch now.

Binge Buying
Money has poured into ETFs in July, setting the stage for a record year of inflows
Source: Bloomberg Intelligence

As Bloomberg Intelligence's Eric Balchunas pointed out, investors have already poured $35 billion into ETFs this month, bringing the year-to-date inflow to $102 billion and putting it on pace to break the full-year record. The money is largely going into highly liquid ETFs tracking the S&P 500, small-caps and emerging markets, so the risk-on sentiment is obviously firing on all cylinders.

Throw into the mix the barely there level of bond yields around the world and ... wow ... aren't those nickels getting shinier?

Yielding the Right of Way
Dividend yields higher than the rate on 10-year Treasuries make stocks more attractive
Source: Bloomberg

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net