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Two charts today, both from Goldman Sachs, focusing on US equity valuations and
suggest that the secular bear market in US stocks is over. Are we really experiencing an historical anomaly that falls into a “this time is different” narrative or is the current secular bear market not over just yet?
So writes Tiho Brkan (http://theshortsideoflong.blogspot.ca) in edited excerpts from his original article* entitled Chart Of The Day: Earnings Expectations.
[The following article is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Brkan goes on to say in further edited excerpts:
During the early stages of a bull market it is difficult to find a bull, as was the case throughout 2009. That is why the old adage goes along the lines that “bull markets climb a wall of worry”. However, near the end of the bull market, everyone is a bull. Expectations of higher prices and higher earnings are the consensus forecast year after year. Sometimes, expectations are so bullish that they are literally extrapolated into the sky. [Below is a chart depicting the GS year-end 2013 target for the S&P 500.]
Source: Goldman Sachs
Goldman Sachs Portfolio Strategy Research writes:
“Our positive 2013 outlook for S&P 500 has played out much faster than we expected. Our earnings estimates remain unchanged but we raise our dividend estimates and index return forecasts for 2013 through 2015. We expect S&P 500 will rise by 5% to 1750 by year-end 2013, advance by 9% to 1900 in 2014, and climb by 10% to 2100 in 2015. Our 2013 return implies a year-end P/E of 15.0x, a one multiple point premium to our fair value estimate. We forecast dividends will rise by 30% during the next two years. Dividend yield is likely to stay around 2%, in line with the 20-year average.” (highlighted by me)
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Is the secular bear market over? Should we expect rising multiples? Goldman Sachs seems to think so [as illustrated in the chart below].
Source: Goldman Sachs (edited by Short Side of Long)
It is interesting to note, however, that every other secular bear market trend eventually bottomed in single digit PE ratios, apart from the current one. Either this will be a historical anomaly falling into a “this time is different” narrative or the current secular bear market is not over just yet.
Conclusion
Time will tell.
(Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)
*http://theshortsideoflong.blogspot.ca/2013/05/chart-of-day-earnings-expectations.html
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