Multiple Expansion Is Not Sustainable; Guggenheim Warns "Take Profits"

While remaining unapologetically bullish US equities long-term, Guggenheim's Scott Minerd warns that historically, markets that have rallied as aggressively as U.S. equities since November 2012 (an increase of 25 percent), pause or correct to digest their advances. Also, earnings among U.S. companies have flattened and could turn negative within two to three quarters, meaning further upside can only come from multiple expansion. Of the 19 percent rise in stocks year-to-date, 16 percent has already come from multiple expansion. Finally, it appears GDP growth could be entering a soft patch as we work through a number of short-term issues such as the headwinds in housing, reduced growth in China, the full impact of the sequester, and the budget and debt ceiling debates that will take place in Washington in the third quarter – all of which will put downward pressure on stock prices. The near-term outlook for equities makes now a good time to consider the old Wall Street adage, "Nobody ever lost money by taking a profit."

Multiple Expansion Driving the Rally in U.S. Equities

The P/E multiple, defined as the ratio of price to trailing 12-month earnings, has been the main driver of the rally in U.S. equities over the past two years. The S&P 500 index has increased by over 34 percent since the beginning of 2011, of which 28 percent has come from multiple expansion. During the same period, growth in corporate earnings has slowed. The trailing 12-month earnings for S&P 500 companies rose 2.4 percent in 2012 and another 2.5 percent for the first seven months of this year, registering the slowest earnings growth in non-recession years since 1998. Without renewed earnings growth, a continued rally in stocks driven by multiple expansion may be not sustainable.

Source: Guggenheim Partners