Remember, in an environment of healthy corporate profits, soaring asset prices took price-earnings ratios up to hitherto unknown heights. Equity markets looked overvalued, but the “New Economy” paradigm enticed investors into not regarding them as overvalued. Experience shows that a bubble can scarcely be identified with certainty until it bursts. The price-earnings ratios for major stock indices peaked at about twice their historical averages.
Individual stocks, especially from the bubble-plagued TMT sector, experienced much higher priceearnings ratios. For the EuroStoxx, the S&P 500 and the German Dax 30, the ratios are now close to their historical averages. The bubble has been deflated to a certain extent. Booming fixed income markets mirror the faltering stock markets. As investors became more riskaverse, they switched from equities to bonds.