End of Bull Market

It seems like no matter how good everything is going there will always be those that constantly look for that dark cloud in the distance. This Bull Market has been rolling along like a well oiled machine for quite some time now with just a few minor speed bumps. There are some investors that point out that stocks are over valued and everything is going to come crashing down soon. So, is it? Is this bull market coming to an end? The answer is-Yes! Absolutely. After all, nothing lasts forever. But the big question is when. Personally, I don’t see it happening any time soon, especially with Trump’s latest tax cuts which will propel this market well into the future. So, relax and make some money while it lasts.

This strong bull market and its underlying economic expansion are on the brink of becoming the 2nd-longest in US history. That fact is based on data for 33 business cycles dating back to 1854.

And there is no sign of it stopping any time soon before it credibly threatens the record-holding bull of the 1990s. That’s because we still have the big, essential tailwinds in place: accelerating GDP and earnings growth, very low interest rates, and low inflation to keep those rates down.

But with the trailing P/E multiple hitting over 22.5 times — S&P 2675 / $118 EPS (as of Q3 2017) = 22.67 — many investors are looking out for the end of the bull market based on valuation alone, as if we are about to soar into some crescendo of irrational exuberance.

Given this pricey picture, it’s a very good time to take a step back and get a read on just how over-valued the market might be.

Historically Speaking

We all know about the insane valuations of the Nasdaq Tech Bubble of 1999. But, just how far away from an average “fair value” P/E of 15X was the broader market?

While the Nasdaq P/E was much higher, at the end of 1999 the S&P 500 flashed a scary trailing 12-month P/E multiple of over 29X. It had peaked even higher near 31X in July of that year.

For wider context, the last six bull market tops actually all saw the S&P 500 trailing P/E ratio hit an average peak of 30X earnings. I doubt we get that high again after the lessons learned in the two bear markets of the previous decade, but it’s certainly still possible.

Bottom line: Historically speaking, we aren’t even close to a bubbly valuation peak that would have me concerned about the end of the bull market — especially with 2-3% GDP growth, attractive rates, tame inflation and double-digit earnings growth forecasts, which, for the benchmark index, are expected to reach a record $140 EPS, equating to a forward P/E multiple of just 19X.

The Life and Death of Bull Markets

Bull markets don’t die of old age, nor do they go out with a whimper. They tend to go out with a bang of euphoria as everybody and their brother are buying stocks with emotional zeal.

The death of bull markets is also strongly correlated with two other events: economic recessions and inverted yield curves. We have little danger of either right now.

What we have on our hands now is a wild bull running after he was penned up for 18 months during the earnings recession of 2015-2016.

And this bull is still driven primarily by technology innovation which infiltrates and ignites all sectors including leading areas like Industrial Products, Healthcare, and Construction.

An area of particular interest for me has been how the government data for GDP, productivity and inflation remain so tame when industries like high-performance cloud computing, mobile communication devices, robotics, materials science, and AI applications are actually accelerating growth significantly.

In fact, it is because of technology innovation and increased efficiency that the corporate returns on invested capital across sectors are boosting productivity in new ways that the government data doesn’t capture, or obscures.

And this keeps inflation at bay, which keeps the Fed “easy” until wages start rising.

Heads Down, Picking Stocks

This economic backdrop is one that equity fund managers can really sink their teeth into. They have already been “heads down, picking stocks” in their favorite industries for several years with long-view, multi-year time horizons, so why would they stop now when global fundamentals are still improving?

And a mature bull market still has a big mission left to accomplish in this environment before he rolls over and dies. In two words, it’s called multiple expansion. This is classic late cycle bull behavior as money keeps pushing into stocks as the only game in town and bonds have lost their safety luster.

Bottom line: The trailing P/E will continue to drift above 22X and the forward P/E will make its way toward 20X. Euphoria is a ways off. Think 20 X $145 (forward 12-month EPS) = S&P 2,900 sometime next year, with an occasional 3% gut check to keep us honest. And this estimate will only rise with beneficial tax reform.


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