America's S&P 500 index set a new record above the 2,000 mark this week. The index which tends to set the tone for the rest of the world's stock markets has tripled since the market rally began in March 2009. Solid US economic data and surprisingly good profit growth are behind the latest advance.
What the commentators said
Valuations have reached historic highs. The cyclically adjusted price/earnings ratio (Cape) is 26, around 40% higher than its historical average. Only in 2000 and 2007 was it higher.Profits look stretched too, said Martin Hutchinson on Breakingviews.
Profits were worth 10.8% of US GDP in the year to March, far above the 60-year average of 7.2%. Globalisation and outsourcing may have given profits a long-term boost, but "cheap debt also plays a part and won't last forever".
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The tightening labour market will also hit profit margins as wages are pushed higher. Meanwhile, sales growth has been weak during the economic recovery.
In the last seven major tightening cycles, the S&P rose by an average of almost 5% in the six months before the first hike, noted Capital Economics. Then again, the debt load in developed economies is unprecedented and central bankers are not known for timing rate hikes well.
The rally may well continue for now, but as Oliver Pursche of Gary Goldberg Financial Services put it, investors shouldn't "look at this as the beginning of the next supercycle".
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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