Chips Get Clipped; Bonds Get Bruised

Valuation bubble collides with an earnings bubble

Key Takeaways

• Extreme Bubbles In Valuations and Earnings: The data are haunting. The CAPE multiple of the S&P 500 today now classifies as a 2.9x sigma event — closing in on the bubble high of 3.3x back in December 1999. Lest you take solace, it is way higher than the 1.8x SD event ahead of the 1929 crash. The thing is, EPS growth is now so out of line with historical norms, let alone nominal GDP trends, that it has now reached a 4.6 sigma event — compared to 0.9x at the peak in early 2000. Under a more normal profit stream, the CAPE multiple would be a 4.6 SD event (see page 10 of the Financial Times for more).