Equity Valuations, an Everything Bubble and “Policy Trumpacho”
The S&P is up 8% since the election. Volatility in the US has been squashed. The VIX is near record lows. There has been talk about how valuations don’t matter; how it is about sector rotation; and how making America great again is going to unleash financials, industrials, materials, energy, etc.
Technical research has virtually no mention of potential downside. How could there be, when everything is breaking out? Furthermore, it is argued that since we have moved to digital, margins have expanded and rendered useless any historical comparison of today’s valuation multiples to prior years (the 1960s, 1970s, and 1980s).
Digital profit margins today are the same as they were 10 years ago, before the iPhone, and the same as 50 years ago, before Apollo 11 landed on the moon. The difference is that the price paid today for those margins is 20% higher.
Television, research analysts and conferences say the Trump trade is on, the 18x forward multiple is just right, that it’s just sector rotation and financials, industrials, materials, energy and discretionary will rip as stimulus and tax money comes pouring in. And, of course, this time is different because margins are digitally different.
Yet we have increasing uncertainty around President Trump, the same operating margin level as 10 and 50 years ago with a 20% premium paid, PE10 at its third-highest level ever, a rising rate environment, ERP indicating there’s just 1% of excess return over Treasuries, and numerous recent examples that fundamentals have a way of rearing up and bucking the bad guys off when they get too heady.
But that’s not how this works. That’s not how any of this works. It’s digital.