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> and has a long long way to go. The stock market's price level is well above where it was pre-pandemic, it's trading at earnings multiples in-line with 30+ ye

by RC_ITR 4y ago

> and has a long long way to go. The stock market's price level is well above where it was pre-pandemic, it's trading at earnings multiples in-line with 30+ year averages [1] (what was the 10Y yield in 1990, might I ask?) because earnings have gone up. I know being doom and gloom makes you sound smart (to some), but don't fall into the trap of 'everything is shit now because inflation has been high for 20 months' [1]https://www.yardeni.com/pub/stockmktperatio.pdf https://www.yardeni.com/pub/stockmktperatio.pdf

grey-area 4y ago
Yes, that's why it has far more to go to revert to the mean of earnings and price. Earnings are also artificially inflated, and will drift down, and stock prices with them, we're just seeing the beginning of that process. Here's someone else who called it over a year ago with some charts with counterpoint those you link: https://www.hussmanfunds.com/comment/mc220925/ https://www.hussmanfunds.com/comment/mc220925/ OR CAPE: https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe Note he's in good company, with Jeremy Grantham for example also warning of the same thing: https://www.livewiremarkets.com/wires/grantham-this-is-a-bubble-this-is-serious https://www.livewiremarkets.com/wires/grantham-this-is-a-bub... Just to be clear, the argument is not 'everything is shit now because inflation', it is that the era of easy money has ended, significant inflation and war means a regime change in central bank intervention, and central banks will now tighten till things break. They haven't even managed to unwind QE yet and stop buying their own debt, will they ever? If they do, watch out. This isn't doom and gloom, it's simple realism about the regime change in interest rates - the era of 0% money is gone, in its place we have a normalisation, which means a normalisation of frothy asset prices and a reversion to the mean of earnings and prices in many domains. Usually these things take a year or two to work out, it won't be a fast process.
- sokoloff 4y ago
  I agree with most of what you wrote, but I think it misses that, in an era of 0% money, growth matters more than current profits and so firms rationally trade off the latter in pursuit of the former. When that changes, I think you’ll see earnings rise as chasing growth now carries a higher cost.
  - grey-area 4y ago
    That has changed with persistent inflation. We are now moving up from zero rates.
- RC_ITR 4y ago
  > Earnings are also artificially inflated, and will drift down Citation needed. Maybe we are enter a local minimum, but what, you think off-stock-market value is not going to be brought onto the stock market? I think you should try to raise a private capital fund and roll-up as many mom and pop retailers as you can, then.
- portlander52232 4y ago
  How are earnings artificially inflated?
  - RC_ITR 4y ago
    It's a common trope for people who don't like the fact that the stock market is trading at normal-ish P/E levels to say 'well the E is fake!!! Just wait until the E normalizes!' Usually, they cite things like artificially low input costs (hard to argue that today), unsustainable demand from customers due to 'cheap money' (haven't seen evidence of that yet, the opposite actually), and a general disdain for advertising and retail business models (despite their long-term durability).
    - adammarples 4y ago
      Yes, you are the clever one, everyone else just repeats tropes. Personal debt is at record levels, inflating earnings. That has to unwind at some point and it will be when the cost of money increases, which it will, if the Fed has to trigger a recession to do so. We're in a different regime now.
mikeweiss 4y ago
Do you really believe these sky high earnings are going to continue? And what about all the companies that still have billion dollar market caps but have NEGATIVE earnings? (Atlassian, Snowflake, Uber, Crowdstrike, Shopify.... the list goes on) Folks we are in a tightening cycle in order to fight inflation. It's feels important to remind everyone that economic conditions like this have not happened in decades. This site (hackernews) has pretty much entirely existed in the era of cheap money and low interest rates. Keep your head in the sand at your own peril. Companies are tightening their belts and you should too.
- RC_ITR 4y ago
  >And what about all the companies that still have billion dollar market caps but have NEGATIVE earnings? (Atlassian, Snowflake, Uber, Crowdstrike, Shopify.... the list goes on) I think they are an extremely small part of the $100tn global stock market that people here love talking about because they work there. >Folks we are in a tightening cycle in order to fight inflation. My point was that we are at multiples in-line with 1990, ya know when we had 8% 10Y yields. Folks, call the end of the world at your own peril.
  - metadat 4y ago
    Spot on. Additionally, if the entire world stock market is $100tn, the US is sitting pretty, because at $49tn the US stock markets represent HALF of the entire world stock market.
    - MuffinFlavored 4y ago
      S&P100 is $28t of that, S&P500 is $32t.
  - MuffinFlavored 4y ago
    > My point was that we are at multiples in-line with 1990, ya know when we had 8% 10Y yields. Is any part of you worried the S&P is headed 3600 -> 3500 -> 3200 -> 3000 -> 2800 given the current climate? I'm worried that the current P/E ratio (from EPS TTM, past 4 quarters) might be a bit "rosy", and the next 4 quarters of earnings are over-optimistically priced (not enough pain has been factored in/the effects of corporations having to try to grow for 18 months in a 4% interest rate environment hasn't been priced in yet). If you check https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx https://www.spglobal.com/spdji/en/documents/additional-mater... and https://www.yardeni.com/pub/yriearningsforecast.pdf https://www.yardeni.com/pub/yriearningsforecast.pdf, analysts are forecasting 8-9% earnings growth 2022 -> 2023. That means if we don't hit those numbers, the market will have to reprice itself, no?
bequanna 4y ago
> The stock market's price level is well above where it was pre-pandemic Nope. Only a few percent above and trending sharply downward: https://finviz.com/futures_charts.ashx?t=ES&p=w1 https://finviz.com/futures_charts.ashx?t=ES&p=w1
- RC_ITR 4y ago
  10% in 2 years is a very normal return.
  - bagacrap 4y ago
    negative real returns
    - RC_ITR 4y ago
      Not if your currency of record is the pound the yen or the Euro! Only one of the reasons it's foolish to 'inflation-adjust' asset prices. EDIT: Also one nit > and trending sharply downward If only the stock market's past performance were indicative of future trends!
opportune 4y ago
Earnings and P/E in isolation are not good indicators. They should be at least discounted against the “risk-free” rate of return, which if you haven’t noticed is high relative to the past two decades with further increases to come. What a needlessly condescending reply
- atdrummond 4y ago
  I would imagine most HN posters have never done a DCF analysis in their lives but I know plenty of people who have which have never beat the market. Not sure I buy any model other than Graham-Dodd’s these days.
  - opportune 4y ago
    Sure, that’s probably a better model. I don’t see anything wrong with it and it has more parameters. I just think P/E by itself is way too oversimplified and a pretty garbage metric when used in aggregate + historically due to things like interest rates, sector/business model skew, relative maturity of companies, etc also fluctuating over time. It’s like Week1 of value investing 101, not an actual metric by which you’d want to engage in value investing or historical analysis.
- RC_ITR 4y ago
  Ok what's your equity risk premium? How'd you calc it?
- ztrww 4y ago
  dot-com occurred in an environment where bond yields were considerably higher than they are now. Yet SP500 P/E wasn’t that much lower and had risen to higher levels than in 2021 despite yields being 3x higher.
bagacrap 4y ago
not to alarm you, but the sp500 is only above the pre pandemic high by about 7.5% while the Dow is below. inflation adjusted, sp500 is below pre pandemic highs.
- RC_ITR 4y ago
  It is a very dangerous and naive game to 1) 'Inflation adjust' asset prices (if you think the average stock-holder has anywhere near the spend patterns of the CPI basket, boy howdy do I have something to tell you about home ownership and income inequality: rent is 33% of the CPI bucket and that's an 'imputed cost' for the vast majority of stock-holders who own their homes) 2) Think 7.5% in 2 years is a 'bad return' EDIT: Let's actually play a fun game, what's the real return of the SPY from the perspective of someone planning on taking a trip to Europe/The UK/Japan?

by RC_ITR 4y ago

grey-area 4y ago

Yes, that's why it has far more to go to revert to the mean of earnings and price. Earnings are also artificially inflated, and will drift down, and stock prices with them, we're just seeing the beginning of that process. Here's someone else who called it over a year ago with some charts with counterpoint those you link: https://www.hussmanfunds.com/comment/mc220925/ https://www.hussmanfunds.com/comment/mc220925/ OR CAPE: https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe Note he's in good company, with Jeremy Grantham for example also warning of the same thing: https://www.livewiremarkets.com/wires/grantham-this-is-a-bubble-this-is-serious https://www.livewiremarkets.com/wires/grantham-this-is-a-bub... Just to be clear, the argument is not 'everything is shit now because inflation', it is that the era of easy money has ended, significant inflation and war means a regime change in central bank intervention, and central banks will now tighten till things break. They haven't even managed to unwind QE yet and stop buying their own debt, will they ever? If they do, watch out. This isn't doom and gloom, it's simple realism about the regime change in interest rates - the era of 0% money is gone, in its place we have a normalisation, which means a normalisation of frothy asset prices and a reversion to the mean of earnings and prices in many domains. Usually these things take a year or two to work out, it won't be a fast process.

sokoloff 4y ago
I agree with most of what you wrote, but I think it misses that, in an era of 0% money, growth matters more than current profits and so firms rationally trade off the latter in pursuit of the former. When that changes, I think you’ll see earnings rise as chasing growth now carries a higher cost.
- grey-area 4y ago
  That has changed with persistent inflation. We are now moving up from zero rates.
RC_ITR 4y ago
> Earnings are also artificially inflated, and will drift down Citation needed. Maybe we are enter a local minimum, but what, you think off-stock-market value is not going to be brought onto the stock market? I think you should try to raise a private capital fund and roll-up as many mom and pop retailers as you can, then.
portlander52232 4y ago
How are earnings artificially inflated?
- RC_ITR 4y ago
  It's a common trope for people who don't like the fact that the stock market is trading at normal-ish P/E levels to say 'well the E is fake!!! Just wait until the E normalizes!' Usually, they cite things like artificially low input costs (hard to argue that today), unsustainable demand from customers due to 'cheap money' (haven't seen evidence of that yet, the opposite actually), and a general disdain for advertising and retail business models (despite their long-term durability).
  - adammarples 4y ago
    Yes, you are the clever one, everyone else just repeats tropes. Personal debt is at record levels, inflating earnings. That has to unwind at some point and it will be when the cost of money increases, which it will, if the Fed has to trigger a recession to do so. We're in a different regime now.

mikeweiss 4y ago

Do you really believe these sky high earnings are going to continue? And what about all the companies that still have billion dollar market caps but have NEGATIVE earnings? (Atlassian, Snowflake, Uber, Crowdstrike, Shopify.... the list goes on) Folks we are in a tightening cycle in order to fight inflation. It's feels important to remind everyone that economic conditions like this have not happened in decades. This site (hackernews) has pretty much entirely existed in the era of cheap money and low interest rates. Keep your head in the sand at your own peril. Companies are tightening their belts and you should too.

RC_ITR 4y ago
>And what about all the companies that still have billion dollar market caps but have NEGATIVE earnings? (Atlassian, Snowflake, Uber, Crowdstrike, Shopify.... the list goes on) I think they are an extremely small part of the $100tn global stock market that people here love talking about because they work there. >Folks we are in a tightening cycle in order to fight inflation. My point was that we are at multiples in-line with 1990, ya know when we had 8% 10Y yields. Folks, call the end of the world at your own peril.
- metadat 4y ago
  Spot on. Additionally, if the entire world stock market is $100tn, the US is sitting pretty, because at $49tn the US stock markets represent HALF of the entire world stock market.
  - MuffinFlavored 4y ago
    S&P100 is $28t of that, S&P500 is $32t.
- MuffinFlavored 4y ago
  > My point was that we are at multiples in-line with 1990, ya know when we had 8% 10Y yields. Is any part of you worried the S&P is headed 3600 -> 3500 -> 3200 -> 3000 -> 2800 given the current climate? I'm worried that the current P/E ratio (from EPS TTM, past 4 quarters) might be a bit "rosy", and the next 4 quarters of earnings are over-optimistically priced (not enough pain has been factored in/the effects of corporations having to try to grow for 18 months in a 4% interest rate environment hasn't been priced in yet). If you check https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx https://www.spglobal.com/spdji/en/documents/additional-mater... and https://www.yardeni.com/pub/yriearningsforecast.pdf https://www.yardeni.com/pub/yriearningsforecast.pdf, analysts are forecasting 8-9% earnings growth 2022 -> 2023. That means if we don't hit those numbers, the market will have to reprice itself, no?

bequanna 4y ago

> The stock market's price level is well above where it was pre-pandemic Nope. Only a few percent above and trending sharply downward: https://finviz.com/futures_charts.ashx?t=ES&p=w1 https://finviz.com/futures_charts.ashx?t=ES&p=w1

RC_ITR 4y ago
10% in 2 years is a very normal return.
- bagacrap 4y ago
  negative real returns
  - RC_ITR 4y ago
    Not if your currency of record is the pound the yen or the Euro! Only one of the reasons it's foolish to 'inflation-adjust' asset prices. EDIT: Also one nit > and trending sharply downward If only the stock market's past performance were indicative of future trends!

opportune 4y ago

Earnings and P/E in isolation are not good indicators. They should be at least discounted against the “risk-free” rate of return, which if you haven’t noticed is high relative to the past two decades with further increases to come. What a needlessly condescending reply

atdrummond 4y ago
I would imagine most HN posters have never done a DCF analysis in their lives but I know plenty of people who have which have never beat the market. Not sure I buy any model other than Graham-Dodd’s these days.
- opportune 4y ago
  Sure, that’s probably a better model. I don’t see anything wrong with it and it has more parameters. I just think P/E by itself is way too oversimplified and a pretty garbage metric when used in aggregate + historically due to things like interest rates, sector/business model skew, relative maturity of companies, etc also fluctuating over time. It’s like Week1 of value investing 101, not an actual metric by which you’d want to engage in value investing or historical analysis.
RC_ITR 4y ago
Ok what's your equity risk premium? How'd you calc it?
ztrww 4y ago
dot-com occurred in an environment where bond yields were considerably higher than they are now. Yet SP500 P/E wasn’t that much lower and had risen to higher levels than in 2021 despite yields being 3x higher.

bagacrap 4y ago

not to alarm you, but the sp500 is only above the pre pandemic high by about 7.5% while the Dow is below. inflation adjusted, sp500 is below pre pandemic highs.

RC_ITR 4y ago
It is a very dangerous and naive game to 1) 'Inflation adjust' asset prices (if you think the average stock-holder has anywhere near the spend patterns of the CPI basket, boy howdy do I have something to tell you about home ownership and income inequality: rent is 33% of the CPI bucket and that's an 'imputed cost' for the vast majority of stock-holders who own their homes) 2) Think 7.5% in 2 years is a 'bad return' EDIT: Let's actually play a fun game, what's the real return of the SPY from the perspective of someone planning on taking a trip to Europe/The UK/Japan?