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Bond Vigilantes To Have the Final Vote
Markets paused to take a breath this week following a six-week ~22% surge. The S&P 500 surrendered a routine ~2.80% – after touching a 12-week high of 5,968. With the market trading at 22x fwd earnings (a premium in any environment) – investors are arguably more mindful of (a) ongoing tariff risks- with new threats from Trump on Europe and Apple; and (b) the thread of rising bond yields – and any potentially widening of the deficit.
Why Earnings Expectations Feel Too High
Factset reported S&P 500 companies are “highly uncertain” for the balance of this year. This is well above the 10-year average of 179; and more than double the previous quarter. And it makes sense… it’s impossible to know what impact tariffs could have over the coming two to three quarters (or more). But what’s almost certain – any impact won’t be positive. We can say with certainty that tariffs (even if only 10%) are an economic burden – where I estimate the cost to both companies and consumers to be more than $300B. So who will pick up the tab?
Brand USA Downgraded
The stock market has risen at a dizzying speed the past six weeks – up over 20%. I would reduce risk at these levels. We’re now back at valuations similar to the beginning of the year – however the risks are now considerably higher. But let’s say the net result is a tariff rate in the realm of between 10% and 30% – that would be disastrous. My back-of-the-envelope math estimates a substantial $300B “economic burden” that both companies and consumers will be forced to bear.
Equity Risk Premium Isn’t There
The S&P continues its impressive six week rally – up over 22% from its early April low of 4,835. At 5,916 – this represents a forward price to earnings (PE) ratio of ~22x – with earnings per share (EPS) expected to be ~ $270 this year. If we take the inverse of 22x – that gives us the market’s earnings yield; i.e., 4.56%. The question whether 4.56% represents a good risk/reward? There’s an easy way to answer that… let’s explore.
For a full list of posts from 2017…