dividends have been criticalfor maximizing total returns.
But what are driving stock prices to all-time highs today?
Multiple Expansion Driving the Rally in U.S. Equities
The P/E multiple, defined as the ratio of price to trailing 12-month earnings, has been the main driver of the rally in U.S. equities over the past two years. The S&P 500 index has increased by over 34 per cent since the beginning of 2011, of which 28 per cent has come from multiple expansion. During the same period, growth in corporate earnings has slowed. The trailing 12-month earnings for S&P 500 companies rose 2.4 per cent in 2012 and another 2.5 per cent for the first seven months of this year, registering the slowest earnings growth in non-recession years since 1998. Without renewed earnings growth, a continued rally in stocks driven by multiple expansion may be not sustainable.
When multiples are expanding, stocks are getting “more expensive.”