Noting expensive stock valuations and earnings streams that are unlikely to kick in for several years, Gluskin Sheff economist David Rosenberg is advising caution for investors, according to a Financial Post
In his regular morning note Breakfast with Dave
, Rosenberg pointed out that the forward price-to-earnings multiple on the S&P 500 has hit 18.5x on a 12-month forward basis. According to him, it indicates a pricey market, whether one considers the norm over the past ten years or the average of the past 25 years (excluding the dotcom bubble).
“The market is more expensive now than it was at the 2007 peak when it was a snick below 17x on a forward basis,” he wrote. “I think this may answer the question as to whether prudence calls for taking profits at this point or chasing what seems to be a rally predicated on faith, hope, repositioning and momentum.”
Rosenberg noted rosy expectations from the stock market, which is pricing in 30% earnings growth over the next year – a rate of profit growth that he says has occurred only 5% of the time in the past six decades.
He added that a forward price-to-earnings multiple of 18.5x often occurs at or near the top of the bull market cycle. “Investors buying the market at today’s level are (perhaps unwittingly) paying up for an earnings stream that is unlikely to materialize before 2021 or nearly four years out,” he said. “That is what I call testing anybody’s patience.”
Rosenberg’s warning coincides with a 14% rise in Canadian corporate profits in the third quarter, which hit $80.7 billion according to Statistics Canada. The quarterly rise was a relief following four consecutive declines, which left Canadian firms operating profits still down 1.1% year-over-year from Q3 2015.
Dina Ignjatovic, an economist at TD Economics, said that a profit bump was expected as the effects of the Alberta wildfires have started to diminish. She added that a boost in exports from a weak loonie, a healthy US economy, and increased revenues from higher commodity prces portend continued rises in profits for the rest of 2016. “That said, further out, the outlook has been clouded by the outcome of the US election, as pro-growth policies could sustain Canadian demand and profits, but increased protectionism in the U.S. could have the opposite impact,” she said.
Should investors be taking cues from Trump?
How should advisors react to the unpredictable energy market?