It’s All About The Earnings Baby
To continue on our theme from last night.
The chart above is as clear as night and day. The S&P has completely disconnected from its earnings reality. And with Shiller’s S&P P/E ratio at 29.00, that is not necessarily good.
The S&P earnings have peaked in 2014. Since then they have declined 18% while the S&P is up just about as much. Leading to massive multiple expansion.
There can only be two possible outcomes at this point. Either earnings accelerate in a major way, to catch up to today’s valuation levels or the stock market will correct. Quite possibly in a violent fashion.
At least for the time being the market believes that President-elect Trump will be able to work some sort of a miracle and earnings will surge. Based on "phenomenal" tax cuts, infrastructure spending and further stimulus. You will not find me in that camp. Our structural problems are too great for the economy to turn around so fast.
If anything, earnings are likely to continue on with their deceleration. Why? To begin with, most of the earnings growth since 2009 has been a function of zero interest rates, massive QE, stock buybacks, etc….Since most of these factors are no longer working in the market’s favor, it would be reasonable to assume that a massive bear market is just around the corner.
If you would like to find out exactly what happens next based on our Timing and Mathematical work, please Click Here.