Investing.com — Citi Research’s proprietary Bear Market Checklist (BMC) has climbed to its highest level since the 2008 global financial crisis, with 10 of 18 indicators now flashing warning signals.
The checklist tracks 18 measures spanning equity valuations, credit markets, corporate behavior and investor sentiment. Indicators are assigned green, amber or red ratings based on historical thresholds, with amber flags counting as half a point and red flags as a full point.
The current global reading of 10 out of 18 compares with a peak of 17.5 in March 2000 and 13 ahead of the 2007-08 financial crisis.
The United States remains the most stretched major market, with a score of 11.5 out of 18, while Europe registers 5 out of 18.
“Once the count reaches double digits, it has historically tended to rise more rapidly, signaling a potential acceleration in risk,” Citi Research said.
Valuation indicators continue to account for a significant share of the warnings. The MSCI AC World index trades at a trailing price-to-earnings ratio of 24 times and a forward P/E of 18 times, while its cyclically adjusted price-to-earnings (CAPE) ratio stands at 36. The global equity risk premium is 2.5%.
U.S. valuations are more elevated, with a trailing P/E ratio of 28, forward P/E of 22, CAPE of 46 and an equity risk premium of 2.5%.
The yield curve, measured by the spread between 10-year and two-year government bond yields, stands at 41 basis points globally and in the United States.
By comparison, the spread was negative 50 basis points at the March 2000 market peak and flat at the October 2007 peak.
Sentiment indicators also point to growing optimism. Citi’s Levkovich Index, a measure of investor panic and euphoria, stands at 0.87 globally and in the United States, levels the broker described as “euphoric.”
Analyst bullishness is 1.4 standard deviations above its historical average globally and 1.0 standard deviation above average in the United States. Equity fund inflows over the past three years amount to 1.1% of market capitalization globally and 0.4% in the United States.
Corporate activity has also strengthened. Capital expenditure growth is projected at 21% year-over-year globally and 33% in the United States for 2026. Global merger-and-acquisition activity over the past 12 months amounts to 3.7% of market capitalization.
Initial public offering activity has picked up, with announced and expected large U.S. listings lifting IPO issuance to 0.4% of developed-market capitalization, pushing that indicator into amber territory, Citi said.
Profitability measures remain robust. Global return on equity stands at 6%, while U.S. return on equity is 21%. Global earnings per share are running 27% above their previous peak, compared with 34% in the United States.
Credit market indicators remain relatively benign. High-yield bond spreads are 263 basis points globally and in the United States, while investment-grade spreads are 73 basis points. Net debt-to-EBITDA for non-financial companies stands at 1.3 times globally and in the United States.
Despite the elevated reading, Citi said the checklist “does not yet indicate a state of pronounced overexuberance” and maintained a constructive outlook on equities through year-end.
