Marc Faber, publisher of The Gloom Boom & Doom Report, has been warning us that the stock market is expensive and that we’re due for a big crash.
“In 1987, we had a very powerful rally, but also earnings were no longer rising substantially, and the market became very overbought,” Faber told CNBC recently. “The final rally into Aug. 25 occurred with a diminishing number of stocks hitting 52-week highs. In other words, the new-high list was contracting, and we have several breaks in different stocks.”
And with earnings growth limited, recent gains have been largely driven by an expanding price-earnings multiple, a measure of stock market value.
“The equity rally that began in 2009 has pushed valuations higher, but has received little support from earnings,” writes Morgan Stanley’s Hans Redeker in a new note to clients. “Indeed, since June 2012 the equity market rally was entirely driven by valuation and not earnings.”
“While there have been cases when better economic conditions pushed up earnings, providing equity market support, there have also been occasions when valuation driven equity market rallies translated into weakness, as witnessed in October 1987,” adds Redeker. “The equity market rally which began in 1986 and peaked in the summer of 1987 falls into this category, as can be seen in Exhibit 6.”
Hopefully, some of the improving economic data we’re getting will translate into earnings growth for stocks.