Interesting comments from John Hussman, who remains very sceptical of the rally:
The S&P 500 is currently priced to deliver total returns averaging about 6.1% annually over the coming decade, even assuming that the future trajectory of S&P 500 earnings continues to obey the long-term peak-to-peak growth channel that has characterised earnings for most of the past century. Notably, that 6.1% annual projected return was equaled at the market peaks of the 1960’s, early 1970’s and at the 1987 peak. Lower prospective 10-year returns were only observed during the late 1990’s, which have been followed, not surprisingly, by 10-year returns lower than 6.1% annually. When stocks are overvalued, one does not get to have his cake and eat it too, without getting indigestion later.
We generally present valuations from the standpoint of earnings, applying a wide range of historically consistent terminal P/E multiples to mid-channel earnings 10 years hence, projected using the very well behaved historical growth channel for S&P 500 earnings across economic cycles. Of course, we can also analyse valuations from the standpoint of the discounted cash flows that are likely to be delivered to investors over time. These include our variant of the Barsky-DeLong model (presented in Don’t Discount Discounted Dividends, and the realised payout model that I presented in The S&P 500 as a Stream of Payments.
The following charts update where valuations stand from a discounted payout perspective.
The Barsky-DeLong model is the most charitable and optimistic. That approach assumes that stocks have gradually become less risky as the economy has developed, and therefore deserve higher valuations over time. Thus, although stocks were priced to deliver a real, after-inflation return of 7% annually early in the century, the Barsky-DeLong model would currently be happy with long-term real returns of just 4.2% annually. Of course, lower required returns imply higher equilibrium valuations. On the basis of that 4.2% annual real return target, the appropriate index level for the S&P 500 would currently be about 810. Again, this is the most charitable model. The red line below tracks the actual S&P 500 index. The blue line is our version of Barsky-DeLong. Given that current index levels are well above those implied by the model, the conclusion is not that stocks must decline immediately, but rather, that long-term total returns for the S&P 500 are likely to be less than 4.2% after inflation.
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