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.

Cue summer blockbuster movie-trailer voice: 

"Imagine a world where central bankers were not pumping billions of dollars a month into markets, where bond yields never went negative and stocks were free to trade on fundamentals rather than being the only game in town."

In that fictional place, the latest research from Doug Ramsey at Leuthold Group might be quite scary indeed. Ramsey monitors "three dozen or so U.S. valuation measures" (God bless you, Doug!) and laid out the scenario of what would happen if some of them reverted to their median state since 1957. And, well, let's just say it isn't pretty. That reversion would result in a drop of about 22 percent in the S&P 500 to 1,705:

Reversion Aversion
A return to more average valuations would mean a significant drawdown in the S&P 500
Source: Doug Ramsey, Leuthold Group
Note: The weighted average gives half weighting to dividend yield and price-to-book ratios

None of these are signs of an outright bubble, according to Ramsey's view, but there is one metric that does make the market look bubbly -- and it just so happens to have the highest correlation with subsequent returns in stocks over five and 10 years.

Which brings us to (cue the dramatic movie music) The Scariest Chart in Leuthold's Database: Price-to-sales ratio for the S&P Industrials Index. That's not to be confused with the industrial sector of the S&P 500, which consists of 68 stocks that are mostly manufacturers and transportation companies. Rather, the S&P Industrials contains 370 stocks that represent a wider definition of what "industrials" mean -- it's basically everything in the index except for financials, transportation and utilities.

And, well, just look at the chart: 

Setting Sales
As a multiple of revenue, the valuation of the S&P Industrials is approaching the dot-com bubble
Source: Leuthold Group

Smart people will tell you that averages in valuations will be reverted to eventually. (Here, for example, is Rob Arnott of Research Affiliates telling us exactly that just a few weeks ago.)

So the question is probably when, not if, that happens -- unless global central banks have magically managed to extinguish mean reversion with stimulus that at first seemed like emergency defibrillation but now feels more like a permanent pacemaker.   

To believe in mean reversion doesn't necessarily mean you need to believe that a sharp selloff in stocks is needed to bring valuations back in line. Were outrageous valuations the match that started the fire in the dot-com bubble days, or just the fuel that fed the fire? That's an argument that isn't quite settled 16 years later. Many will point to a Barron's article near the top that described the horde of internet companies at risk of running out of cash, while others point to the Microsoft antitrust case as the primary catalyst. 

If anything, research suggests that subsequent future returns will be below average when valuations are above average. 

In other words, who knows if what we're watching will turn into a horror flick one day or just a period drama that drones on and on about feelings and stuff. 

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

To contact the editor responsible for this story:
Daniel Niemi at