Valuations. Get ’em while they’re rich. It’s like the old adage says: Buy high, sell higher. You may be a fool, but there’s a greater fool out there somewhere.
US equities are up sharply — astronomically — from the cycle lows. We don’t talk about that a lot these days because who remembers the cycle lows? That was a very (very) long time ago. Joe Biden was still president back then.
Measuring from the bottom in October of 2022, the S&P’s up 60% or so, pretty solid for two years’ work.
Needless to say, some of the Mag7 names are up a lot more over the same window. Amazon’s doubled. Meta’s quintupled. Nvidia’s — I don’t even want to tell you. Look it up for yourself.
What part of these gains is fundamentals and what part’s speculation, where “speculation” means paying more for every dollar of sales and/or earnings?
The answer is that a lot of it’s speculation. As SocGen’s Andrew Lapthorne noted Monday, the 12-month forward P/E for the index is up 40% from the lows (figure on the left, below), while the dividend yield’s “below the February 2000 bubble” at 1.2%.
The US, he wrote, now trades at a record valuation premium to global equities, and as the figure on the right shows, US shares now account for nearly three-quarters of global market cap, likewise a record.
“This is almost entirely down to the valuation premium, without which the US would be closer to 50% of MSCI World,” Lapthorne went on.
Not bad for companies based in a “failing” country. Just imagine how dominant US shares will be once America’s great again. Again.
I was chatting with a financially literate friend yesterday how the run up has felt quite excessive. I don’t know when precisely the options market became the underlying of the equities market, but we were chatting about how the greatest stock crashes come about when very smart people take on a lot of leverage.
Trump will be disappointed as the standard Kichin business cycles tell us that the peak is either here now or will be seen in a few months right after is Inauguration. (I was not invited). The fact is that odds strongly favor 2025 as a down year for U,S. equities.