The stockmarket melt-up just keeps going

Levels of public debt not seen since World War II; a labour shortage; fast-rising inflation; more new Covid-19 variants; small businesses suffering from supply crunches; chaos in Afghanistan; rising mutterings about inequality; anti-wealth and anti-market policies in China; ridiculously high equity valuations in the US. It’s a lot for markets to cope with. You’d think they’d wobble some, but no. Instead, the melt-up just keeps going – and America’s S&P 500 index just keeps hitting record highs. Should you worry?

There are stories you can tell to make yourself feel a bit better (stockmarkets are nothing more than a sum of stories). You could perhaps argue that US earnings estimates are rising so fast that it makes everything look kind of OK. S&P 500 stocks as a whole beat analysts’ estimates nicely in both the first and second quarters – so everyone is now busy upgrading their forecasts for the year. The higher these go (S&P average forecast operating earnings per share are now at a record high) the less awful valuations look, and the easier it is to justify endlessly rising stockmarkets.

You could also argue that the Federal Reserve, America's central bank, is clearly very conscious of the stockmarket (maybe too conscious) and will be keeping interest rates so low for so long that if you want an income of any kind, there is no alternative to the stockmarket. You might also note that companies must be feeling pretty optimistic: stock issuance is currently at its highest level ever in the US – “blowing away the last high set in the run up to the Tech Bubble”, say the analysts at asset manager GMO. And this isn’t just about new firms coming to market (the Spacs – special purpose acquisition companies – you have heard so much about). Instead, most new issuance is coming from “seasoned companies”.

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Unfortunately, none of these things are quite enough. Analysts have a trying tendency to extrapolate everything – basing forecasts not on actual predictions of the future, but on assumptions that the future will be almost identical to the immediate past. Yardeni Research notes that the average analyst’s estimate of forward earnings for US energy companies is up by 1,558% since last year’s lockdown lows. In lockdown, analysts assumed lockdown forever. Out of lockdown they perhaps assume pent-up demand release forever. The latter is as unlikely now as the former was then. As for issuance, it would be nice to think that it reflected companies being full of brilliant ideas as to productive ways to use the cash. However, it is just as likely, as GMO says, to reflect that “Wall Street knows an eager, price-insensitive buyer when it sees one... when the ducks are quacking, it’s time to feed ’em”.

And interest rates? It makes some sense to think about markets in relative terms, but at some point absolutes will matter too. When that happens, eager, price-insensitive buyers will be in for a shock. With that in mind, let us bore you again with the suggestion that you bring some of your cash home – to the UK market. The UK is not as cheap as it was, but it is much cheaper than most other markets. If we don’t buy it, private-equity firms will soon own the lot. And we won’t like that.