A Peak Above All Others

Tyler Durden's picture

Authored by 720Global's Michael Lebowitz via RealInvestmentAdvice.com,

“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.

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.

The table above makes an assumption worth noting. The data includes implied earnings growth under the assumption that the price of the S&P 500 will not change for ten years. If we assume prices rise at the historical average of 6% per year, then the EPS growth required to normalize CAPE is nearly 9%, or 80% greater than the EPS growth experienced over the last 100 years.

In Second to None, we compared CAPE valuations to GDP trends and came up with similar results as shown below.

When one compares current valuations and supporting economic fundamentals to data that preceded damaging market corrections, they may conclude, like us, that today’s equity market valuations may very well be the most egregious observed.

Like any illness, one cannot begin to treat a condition until it is properly identified. 720Global and many other astute market observers continue to produce compelling evidence that there are a variety of economic ills and gross mis-valuations with which investors must contend. The absence of consequences to this point seems to be broadly misinterpreted as “all’s well”.  It is the medical equivalent of “the x-ray must be wrong because I feel fine.” The evidence argues otherwise just as it did in the months preceding 2000 and 2008.

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NoWayJose's picture

But all previous 'peaks' had to be funded with 'real' money - today - the money is not so real because of central banks!

Paul Kersey's picture

The Main Street economy, with its debt serfs, part time work force and record high national debt, affects 99% of Americans, while the Fed asset-pumped stock market, where 1% of the population owns 83% of the stocks gets the lion's share of attention.  Consequently, stock market valuations,  real or fake,  don't mean shit to over 3/4 of Americans, who are living from paycheck to paycheck. 

Matthew John's picture

"while the Fed asset-pumped stock market, where 1% of the population owns 83% of the stocks gets the lion's share of attention.  Consequently, stock market valuations,  real or fake,  don't mean shit to over 3/4 of Americans... "

Well.... I don't know where you come up with that but I think most Americans have their retirement funds in the stock market, mostly through mutual funds. 


OpenThePodBayDoorHAL's picture

Sure, Bubba has $17K in a 401(k) somewhere

But Paul is correct, +/- 83% of stock market gains go to 1% of people

And since the Fed decided stocks and bonds are now "money" that says it all. Bubba doesn't get much of the new so-called "money" but Bezos certainly does

Kina's picture

We are walking on thin air.

idontcare's picture

Gotta hide all that inflation somewhere.   Wake me up when we hit 23K.

Ink Pusher's picture

“Valuations are still well below the peak of 1999”  

A. It's not 1999 it's 2017.

B. The current reported valuations are ridiculously OVERVALUED and everybody knows it... 

C. All is not well when the denial and pump'n'dump indexes have never been higher.

D. Current "evidence" is created ,not assessed or confirmed.(except by 720G)

E. The S&P is buying their own bullshit and then selling it to you and me.

ThanksIwillHaveAnother's picture

Have to compare to FED+ECB+JCB+CHN combined balance sheet.

shadow_index's picture

Yep, +SNB, which buys US and EU stocks directly. Citi's Matt King usually highlights this but his charts are a little coarse.

Ink Pusher's picture

FED : We've got this $4.5T in toxic debt that we want to blatantly convert into auctionable packaged CDO's.

S&P : No problemo, we can do that ,our 2007 toxic debt securitization model is still in full operation.

SEC: We are all going on extended vacation until 2022.


The Count's picture

Its like comparing how stupid a moron is vs. an imbecile. Fact is both are idiots.

Baron von Bud's picture

You've got that turned around. The actual ranking by mentation level from higher to lower is moron, imbecile, and finally idiot. Real life in-order examples would be Trump, Obama, Bush.

NEOSERF's picture

Eyeballing it, assuming the last 2 bubbles hadn't been blown in the first place, the average would be right around 5 or a 75% drop from here

silverer's picture

So there is still room to make more easy money? Pile in, folks! Take out that home equity loan! It really will do the trick. (Just make sure you are leaning on the exit door).

JawsMusic's picture

In places that have experienced Hyperinflation the stock market has done well when measured by the

currency that was hyper inflating.   So these prices might still have a long ways to go...

God know what the S+P 500 price will be when its $1000 for a cup of coffee.



LawsofPhysics's picture

Are they using GAAP or "mark to fantasy" here?

It will make a difference eventually...

"Full Faith and Credit"