It could lead to severe problems for investors, according to strategists.
Christian Mueller-Glissman of Goldman Sachs wrote in a note this week: “It has seldom been the case that equities, bonds and credit have been similarly expensive at the same time, only in the Roaring Twenties and the Golden Fifties.
“All good things must come to an end.
The note added “there will be a bear market, eventually.”
A bear market is where the stock market enters a downward spiral with a 20 per cent drop or more from its peak, caused by widespread pessimism.
Analysts said as central banks lower their quantitative easing, pushing up the premiums, investors are demanding to hold longer-dated bonds which is “likely to be lower across assets”.
Analysts also put forward a second, less likely possibility that would see stock and bond valuations both get hit. If this mix were to include a negative growth shock, or a growth shock combined with an inflation rise.
One strategist said: “Elevated valuations increase the risk of draw-downs for the simple reason that there is less buffer to absorb shocks.
“The average valuation percentile across equity, bonds and credit in the U.S. is 90 percent, an all-time high.”
According to Goldman Sachs low inflation is succeeding during this period, just as it did in the 1920s and 1950s.
The investment bank said: “The worst outcome for 60/40 portfolios is high and rising inflation, which is when both bonds and equities suffer, even outside recessions.”
An increase in policy rates triggered by price pressures “remains a key risk for multi-asset portfolios. Duration risk in bond markets is much higher this cycle”.
Goldman strategists advise putting more capital in to equities which possess great risk-adjusted returns.
Central banks are left with less options to relieve the pressure of its monetary policy as rates and big balance sheets remain low.