As I am known to do, I will peruse articles on the web to find some interesting tidbits. And, I found one in one of Lance Robert’s recent posts.
Within this article, he cited a Doug Kass note, which stated:
‘Despite many who are suggesting this has been a ‘rational rise’ due to strong earnings growth, that is simply not the case as shown below . . . Since 2014, the stock market has risen (capital appreciation only) by 35% while reported earnings growth has risen by a whopping 2%. A 2% growth in earnings over the last 3-years hardly justifies a 33% premium over earnings.
Of course, even reported earnings is somewhat misleading due to the heavy use of share repurchases to artificially inflate reported earnings on a per share basis. However, corporate profits after tax give us a better idea of what profits actually were since that is the amount left over after those taxes were paid.
“Again we see the same picture of a 32% premium over a 3% cumulative growth in corporate profits after tax. There is little justification to be found to support the idea that earnings growth is the main driver behind asset prices currently.
We can also use the data above to construct a valuation measure of price divided by corporate profits after tax. As with all valuation measures we have discussed as of late, and forward return expectations from such levels, the P/CPATAX ratio just hit the second highest level in history.”
So, what is Lance’s conclusion from the Kass note? ‘The reality, of course, is that investors are simply chasing asset prices higher as exuberance overtakes logic.’
And, all of this leaves me scratching my head.
This post was published at GoldSeek on 11 December 2017.