A Peak Above All Others

‘Valuations are still well below the peak of 1999’ say the bulls. They are certainly correct from an absolute basis but we caution that the current level of market euphoria is in a league of its own when compared to prior peaks on an ‘apples to apples’ basis.
The following table compares earnings growth and implied market expectations for earnings growth from the two prior CAPE (Cyclically-Adjusted Price-to-Earnings) peaks to today. CAPE is the price of an equity index, such as the S&P 500 in this case, divided by the average of ten years of earnings adjusted for inflation. Implied market earnings growth is the rate of earnings growth required for the next ten years to return CAPE to its historical average assuming no price changes.
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Earnings over the last ten years have grown significantly slower than during the prior episodes. Despite the weak trend in earnings per share (EPS) and economic growth (GDP), the market is implying earnings will grow at a much faster rate in the future. In fact, the table highlights that EPS must grow almost 4x faster in future quarters than it has over the last ten years if CAPE is to normalize without price losses. That rate is more than double what investors required in 1999.

This post was published at Zero Hedge on Aug 23, 2017.