Summary: The gain in equity prices is now outpacing profits at a rate not see since the heady dot-com days. In fact, on a GAAP accounting basis, profits have been falling. I believe this creates a dangerous situation in view of rising interest rates and market turmoil.
I have talked about multiple expansiona lot in the past few weeks because the US market’s advance is predicated on multiple expansion.The statistic on the gain in share prices outpacing earnings comes from a Bloomberg article yesterday. Here are some illuminating details:
Price gains of stocks in the Standard & Poor’s 500 Index (SPX) are outpacing profits by the fastest rate in 14 years as the bull market extends beyond the average length of rallies since Harry S. Truman was president.
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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.