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Professional investors are starting to worry that stock prices are getting out of hand compared with where they should be.
Valuation has been a key concern of late for market participants in a bull market that just passed its eighth anniversary. The S&P 500 now trades at 18.3 times forward earnings — the 12-month period ahead — which marks the highest level since the market turned around after the financial crisis.
In the latest Bank of America Merrill Lynch fund manager survey, a net 34 percent of respondents find that equities are overvalued. That's the highest level in the history of the survey going back 17 years.
On top of that, a net 81 percent believe that the U.S. is the "most overvalued region" compared with other areas of the world.
"Investor positioning argues for a risk rally pause in March/April, with allocation to equities at a two-year high and bond allocation at a three-year low," Michael Hartnett, BofAML's chief investment strategist, said in a statement issued the same day that major averages slid amid a sharp sell-off in bank stocks.
However, that's the bad news. The good news is that even while valuation is a concern, managers seem to have little fear of a bear market popping up anytime soon despite worries over a "pause."
The most recent threat identified in some corners of the market is that a disparity between Treasury yields and the S&P 500 dividend yield could threaten stocks. The thinking is that rising government bond yields would divert money away from lower-yielding equities.
As things stand now, the dividend yield on the index is 1.93 percent, while the benchmark 10-year note was around 2.45 percent Tuesday. While that gap may seem alluring to yield-seeking investors, it's not enough, according to the survey.
Trouble for stocks won't come until the 10-year hits 3.5 to 4 percent, according to 67 percent of respondents.
The economy doesn't seem to be a particularly large concern either. Worries that the world is in a period of "secular stagnation," or a long-term slowdown that will mute returns, dropped to their lowest level in 5½ years. A net 58 percent believe global growth will accelerate over the next 12 months.
Politically, fears of a trade war sparked by protectionist policies espoused by President Donald Trump fell to 20 percent, while worries about European elections spiking "disintegration risk" led fears.
That doesn't mean there aren't concerns. This year is supposed to represent a breakout for corporate earnings, but estimates lately have been dimming. Should profits not live up to expectations, that would represent another threat.
"Since prices lead fundamentals, the fundamentals better start picking up the pace in order to justify such extended valuations," Sam Stovall, chief investment strategist at CFRA, said in a note to clients.
Pros still think the U.S. dollar trade is the most overcrowded. Portfolio allocation to equities is at a net 48 percent overweight, the highest level in two years.
"Stocks continue to be the asset class of choice," Stovall said. "But this crowded trade will likely need confirmation soon from a pickup in EPS growth and forward guidance before investors can feel comfortable pushing prices even higher."