There’s a crisis brewing, according to SocGen’s Albert Edwards.
He’d know. He’s seen all manner of them over his four-and-a-half-decade career. All manner of crises, I mean. Big, bad, systemic ones, tempests in teapots and everything in between.
Indeed, Edwards has forgotten more crises than I’ve ever known, and not just because he’s older than me. Also because some of those crises only happened in his head. (I’m just kidding, Albert.)
In his latest dispatch, Edwards was restrained. He only used the word “crisis” twice, compared to the four-decade, per-note average of 14. (Just kidding again, Albert.) But he did say “the ingredients for a market ‘accident’ are falling into place.”
One of those ingredients is, of course, higher bond yields. The figure below shows you what the relentless trek higher for G7 borrowing costs means for relative equity expensiveness based on dividend yields.
That speaks for itself, but Albert spelled it out just in case. On that metric, stocks have only been this stretched one other time: During the dot-com boom.
“We will soon hear the groans of the financial plumbing straining under the pressure, but higher yields alone are unlikely to catalyze an end to the AI-driven equity bull market,” Edwards wrote, on the way to conceding that as market-timing devices go, valuations alone aren’t especially useful.
“One of the few things I have learned in my 44 years in the markets is that stretched equity market valuations will not in [themselves] trigger a bear market, [but they] most certainly leave the market more vulnerable to ‘bad’ news,” he went on.
In other words: The richer the equity market, the more sensitive it tends to be to troubling developments. Ironically, absolute valuations have actually come down quite a bit of late as profit expectations outstripped price gains. But we tend to reference a forward multiple in that discussion, and what are forward multiples? Valuations based on forecasted profits. Forecasts can be wrong.
We’re currently experiencing a profit boom the likes of which is virtually unprecedented outside of quarters during which corporates were lapping recession comps. You can see the same dynamic if you plot the ratio of forward earnings to trailing, as shown below.
As you can see, the only other episodes during which the forward versus trailing ratio was as elevated as it is currently were stretches coming out of NBER-designated downturns.
I shouldn’t say “the only” other episodes. There is one more anomaly akin to what we’re seeing in 2026: Summer of 1987. How’s that for foreboding?
“So the two key things investors should watch out for are (over)-extended equity valuations compared to relentlessly rising G7 bond yields and whether we are close to peak profits optimism,” Edwards said, summing up. “Certainly, outside of recession aftermaths, analysts are never normally this bullish.”
I know you’ve discussed it a million times and you’ve frequently shown projections of FCF as well, but every time I see the forward looking forecasts of “profit” and PE ratios that seem downright normal, I can’t help but note that those estimates of profitability are heavily dependent on assumptions about the useful life of very expensive assets and the cashflows will take a long time to catch up to profit. Will be interesting to see how that dynamic plays out, but I suppose if the hyperscalers can cut 20% of their workforce and replace them with AI while simultaneously selling AI to the masses, it just might work out for them.
The old me (pre-Heisenberg) wouldn’t have understood those nuances despite holding two business degrees, so hopefully that means I’ve learned something from 6 years of reading your content.
In 1987 I was a rookie in a small investment firm – what a baptism under fire! But, to the everlasting credit of my mentor, we were pushed to buy the hell out of the market after the crash. Following that advice turned out to have permanent and positive impact on my career and income. Similarly, 2009 was one of my best years ever….so…”I ain’t afraid of no ghosts”!
Does that mean you’re sitting on a bunch of cash waiting to buy?
I was in a meeting on the day of the crash. Couldn’t do as much as I wanted that day. But the next morning I got in to buy as much as I could afford by selling much of my remaining bod holdings. Kept on for two or three months. I still hold a bunch of what I bought then. They pay better dividends than the market does today. So do my bonds.
Not long ago it was common to read about how bond vs stock allocations were reset quarterly or even monthly by asset allocators. I haven’t seen much about this recently, but if those folks are still walking the earth, wouldn’t this be a situation where that might start to kick in?
Some of us. My S&P type stocks are 15% of my portfolio. I have a similar amount in BDCs. The rest is in munis, bond funds, other credit and some other CEFs. My total income has grown annually since 2000, 5-6% per year since I retired. BTW, I really enjoy your comments here. I reinvest half my income and I expect to hit another milestone next year. More to share.