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The Stock Market Is Completely Untethered From Economic Reality

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We’ve been saying for months that the stock market has completely disconnected from economic reality. The markets have hit record highs despite the economic chaos caused by the government response to COVID-19. As Peter Schiff put it in a podcast back in May, the markets are on a Fed-induced sugar high.

In a recent article, David Stockman put the stock market bubble into perspective and asked a poignant question: how could the S&P 500 be trading at its highest multiple in 70 years when the growth rate of corporate earnings has been sinking for more than two decades?

Here are a few market extremes Stockman notes.

  • Amazon is now 43% of the S&P 500 consumer discretionary index;
  • Nearly two-thirds of the market is underperforming so far this year;
  • Year-to-date, only one in three stocks is actually in the green;
  • One in five stocks is down 50% or more from its all-time high;
  • The five largest stocks in the S&P 500 have a combined market cap that equals that of the “smallest” 389 stocks;
  • Apple, Amazon, Microsoft, and Google—four companies—have a combined market cap (over $6 trillion) that is greater than the GDP of every country in the world, minus the US and China;
  • Tesla, having surpassed Walmart (with one-twentieth of the revenue!), has become the ninth-largest stock in the US.

The forward price-to-earnings ratio is the current price of a stock over its “predicted” earnings per share. In the last 70 years, the S&P 500 has only traded at a higher forward PE multiple than today 0.1% of the time. That equal to 4 weeks out of the 3,640 weeks since 1950. The forward PR ratio is currently at record levels, above the previous highs seen during the dot-com bubble.

This should raise the following question: do you really believe companies are going to be making that much money going into the future? If so, on what do you base your optimism on the US economy?

In fact, as Stockman points out, pretax corporate earnings in Q2 2020 plunged by 23% from the Q4 2019 peak. That means that they have a huge hole to dig out of before there can be any growth in the post-Covid cycle. Furthermore, the $1.774 trillion profits reported for Q2 2020 was nearly identical to the $1.773 trillion reported in Q4 2005.

In other words, corporate profits have been thrown backward by 15 years.

If you believed that current market levels had anything to do with the economic fundamentals, you would have to argue that the long-term trend of corporate earnings growth is fixing to pivot from the sinking pattern shown above to a new phase of parabolic rise.

This very idea is preposterous—besides, earnings don’t have anything to do with the casino’s current speculative frenzy.

Instead, what we have is pure, unadulterated inflation of PE multiples. That’s a monetary phenomenon—the AWOL inflation that the Fed heads keep gumming about.

In simple terms, the stock market is a big fat ugly bubble. And as Peter Schiff said in a recent podcast – every bubble eventually finds its pin.


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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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