“Vulnerabilities associated with elevated risk appetite are rising,” Fed Governor Lael Brainard, the head of the Board’s financial stability committee, said in a statement accompanying the report released Thursday. “The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.” In this environment, prices may be vulnerable to “significant declines” should risk appetite fall, the Fed report noted.
Overall valuations of equity markets are high on most metrics used. The so-called Buffet indicator, measuring the market cap compared to GDP, is at an all-time high. Also, the cyclically adjusted price to earnings ratio, CAPE, dividing the current stock prices by the average 10 years inflation adjusted earnings of the US market, is at the highest since the dotcom bubble.