Whether its our old friend Binky from Deutsche or Tommy Lee from JPMorgan, the uber-bullish permanence of these well-paid serial extrapolators seems to pivot critically for 2012's forecasts on one thing: multiple expansion. On whatever empirical metric the Bill Millers of the world look at, stocks are cheap - no matter the changing dynamics underlying the entire system that seems so obvious to the rest of us. As JPMorgan notes, even assuming a 15% earnings decline (possible:- in Q4 2011, the percent of negative S&P 500 earnings pre-announcements matched its 2001 and 2008 peak, and another sign: companies reporting before Alcoa beat consensus earnings for the last 9 quarters, while in Q4, they trailed estimates by 2%.) the S&P 500 is priced at the cheap end of history.
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The answer to why measures such as Price-to-Book and Price-to-Earnings have adjusted down so considerably is, however, very evident when once considers where the profitability has come. In contrast to prior recovery cycles, current cycle profits have been driven significantly by very low labor compensation.
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David Cembalest says it best: "Given the fiscal, social and political issues this creates, it’s hard to pay a very high multiple for this kind of profits boom."
Source: JPMorgan