Is The Multiple-Expansion "Dream" Over?

The current market environment of increasing event risk (suppressed by the all too visible un-tapering hand of the Fed) and slumping earnings expectations has had little to no effect on either the US equity market nominal level or the commission-taking asset-gatherers pitching the "long-term" buy that the market always is. Through the magic of multiple expansion, stocks remain at all-time highs and are pitched as "cheap" because multiples can still get bigger - remember March 2000 25.6x P/E... There is only one thing wrong with that dream. No matter how hard the Fed tries (mistakenly as we noted here) to pump the "economy" full of money to make consumers feel good, Consumer Sentiment has hit a wall...

 

The ubiquitous "but P/Es can expand much much more before they have hit a 'top" chart...

 

But aside from the dot-com bubble, current levels of valuation are at or near peak of the last 30 years...

On a historical earnings basis...

 

and a forward-looking basis...

 

But, it's all about confidence... investors will not be willing to pay increasing multiples unless they are confident that the future streams of earnings are sustainable and forecastable... And simply put, the current levels of Consumer Sentiment need to almost double for the US equity market tp approach historical multiple valuation levels...

 

And remember - as we noted here - its the 80% that consume and the 80% are not benefitting from the wealth effect (much to the chagrin of the Fed).

So next time your "manager" or investment advisor proclaims stocks are cheap compared to historical peak levels, perhaps its worth asking him with "risk" priced into the market at almost all-time lows,

 

a Fed that is only capable of feeding the richest percentiles of the nation (the rich have never been more comfortable)

 

 

Where is the next doubling of Sentiment coming from? Especially in light of the collapse in economic confidence that Washington is inspiring...

 

And the cyclical budget-spend now over (and absolutely not expected to pick up anytme soon given the "negotiations")...

 

As we noted before, Be Careful Of The Big Con...Be careful about being too quick to believe that the sluggish economic dynamic that has “dogged us” for the last 6 years is yet fully behind us. If we are correct then the Fed is likely going to have to agonize in the 4th quarter whether to stick with its implicit guidance and taper and even if they go ahead with that decision they may find themselves having to reverse it later.

For the 3rd time in this 17 year period we MAY be looking at a 4 year 4 month rise in consumer confidence before a turn lower again.