Over the course of a complete economic cycle, S&P 500 profit margins vary between 4% and 8%, historically averaging 6%. $92 per share will represent a profit margin of 8.4%, the second highest on record.
Since 1957, nominal earnings have grown an average 6% per year. What is the likelihood that earnings will grow more than twice the average rate off of peak profit margins and peak earnings, while revenue growth slowed to 2.5% year-over-year in March 2013?
Forward P/Es are a relatively new phenomenon. Historically, markets traded for an average 15x trailing earnings. If the S&P 500 does in fact earn $92 per share, the market is already trading for 18x trailing earnings on the highest earnings ever.
Fixed income securities are priced to lose money in real terms and may experience nominal losses if sold before maturity. However, such poor valuations in fixed income do not eliminate the risk of loss in stocks. Historically, equities have lost value in one out of three years. Stocks lost over 50% in value during the last two bear markets. Overpriced fixed income securities will not save overpriced stocks.
Housing’s resurgence is unabashedly bullish. Record-low interest rates and tight inventories coupled with real house prices at early 2000s levels have greatly enhanced affordability. Though, price gains will likely slow over the next two years as inventory returns to the market.
The Fed has embarked with an unprecedented policy response with little negative side effects to date. The real economy impact has been muted, while investor exuberance in credit and stock markets is apparent. There is significant risk in both the Fed overstaying their welcome and the Fed failing to effectively exit accommodation without reverberating impact.
source: dshort
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