Why Is The Stock Market So Strong?
By Tyler Durden
Submitted by Pater Tenebrarum via Acting-Man.com,
Dismal Earnings, Extreme Valuations
The current earnings season hasn’t been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market’s valuation is already between the highest and third highest in history depending on how it is measured.
Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “wall of worry” type of phenomenon actually, since many of the negatives are of course widely known.
The S&P 500 and the Nasdaq Composite, daily. The vertical blue bar on the right shows the range we expected the rebound to be contained in – this has now clearly been exceeded. However, the technology sector continues to underperform the broader market in this rally – click to enlarge.
After the immediate crash danger receded in February, we expected that a sizable rebound would be in the offing, but it is fair to say that the rebound has by now gone quite a bit further than we expected, if not by much yet. In fact, the S&P 500 Index is almost back at the level of early November as we write this.
Note though that the Nasdaq continues to underperform in the current rally – which has been mainly driven by sectors that were previously weak. In the process, market internals have improved considerably, but the former leading sectors all remain well below their previous peaks. So all is not well just yet, even from a technical perspective.
To see how extremely overvalued the market is, take a look at the chart below, provided by John Hussman, which measures stock market valuation as the ratio of non-financial market capitalization to national non-financial gross value added, including estimated foreign revenues (note: due to stronger internals, Dr. Hussman is currently not strongly bearish in the short term).
In terms of this measure, the market has only been more overvalued than today at the peaks of 1929 and 1999/2000. 1937 came close as well.
We should add that the recent combination of rising stock prices and declining earnings has driven the market’s trailing P/E ratio to its second-highest level in history (we are only considering bull market extremes – in 2008/9, a collapse in earnings drove P/Es even higher). However, at e.g. the 1929 market peak, the S&P’s dividend yield actually exceeded today’s by more than 50% (to be fair, bond yields were significantly higher as well).
Anyway, the main point we want to make is that from a valuation standpoint, investors are playing with fire. Obviously, neither declining earnings nor extreme valuations mean that the market has to decline or cannot keep rising even further. After all, it has happened before. Moreover, the opposite can happen as well: in 1973-1974, S&P 500 earnings rose every quarter – and yet, the market fell by 56%.
Over the long term, the stock market actually rises approximately 67% …read more
Source: Why Is The Stock Market So Strong?
