It’s Time To Sell US Stocks

A trader works on the floor of the New York Stock Exchange.
(Photo by Spencer Platt / Getty Images)
By two simple valuation measures, the S&P 500 is overvalued by the biggest margin in twenty years.
First, the S&P 500 level has run ahead of earnings per share to an extent not seen since 1999, right before the great tech crash.
Second, earnings per share exceed actual profits by the largest amount in the past twenty years, mainly due to equity buybacks. Buybacks are an effective way to boost earnings per share by reducing the number of outstanding shares. That works when interest rates are low and credit conditions are easy, but not so much when rates rise.
The chart above shows the regression of the level of the S&P against earnings per share. The circled areas on the residual line show periods when the S&P rose much more than per-share earnings could explain. By this reckoning the S&P is a full 500 points (or 18%) higher than predicted by the long-term relationship between earnings and price.
That’s not the worst of it, though.
Corporations report their total profits to the Treasury Department for tax purposes, and the government uses this data to calculate the actual level of corporate profits. In the chart below, we compare after-tax corporate profits to reported earnings per share.
Earnings per share are much higher ($10 per share, or 28%) than the total amount of after-tax corporate profits can explain.
Assuming that the level of the S&P reverts to the historical relationship between index price and earnings per share, and, secondly, that earnings per share revert to the historical relationship between EPS and total corporate profits as reported by the government, the index will fall by 18% + 28%, or 46%.
I’m not predicting a 46% decline in the S&P 500, to be sure. But the stock market is so rich by historical standards that it is a lot more likely to go down than to go up.
This article originally appeared on Asia Times.
Originally published on Townhall Finance.
Trending Now on Affluent Christian Investor
Sorry. No data so far.
The Affluent Mix
The Era Of No Consequences January 14, 2021 | Frank Vernuccio

Income And Well-Being January 14, 2021 | Jim Huntzinger

How Companies Pay Shareholders: Buybacks Don’t Subtract From Wages... January 14, 2021 | Jerry Bowyer

Taper Nervous Breakdown January 14, 2021 | Michael Pento

China, Democrats, And Donald Trump January 8, 2021 | Frank Vernuccio

Biochemical Engineer Ivor Cummins Discussing “The Rosetta Stone Of Modern ... January 7, 2021 | Jerry Bowyer

Hillbilly Elegy Economics Lesson: Culture Matters... January 7, 2021 | Roger McKinney

Take The Under On 2021 GDP January 7, 2021 | Michael Pento

How Companies Pay Shareholders: Buybacks Are Not A Giveaway... January 7, 2021 | Jerry Bowyer

The History Of Income Inequality And Popping Economic Bubbles... January 7, 2021 | Jim Huntzinger

Diseases Of Modernity: What Do They Have In Common?... December 22, 2020 | Jerry Bowyer

Mobocracy December 22, 2020 | Frank Vernuccio

Beware Market Land Mines: Stimulus, Vaccine Failure, Interest Rates... December 22, 2020 | Michael Pento

Following Classical Economics December 22, 2020 | Jim Huntzinger

What Prostate Cancer Taught Me About Our Fiscal And Physical Health Code Blue... December 22, 2020 | Kevin Cullis

The War Of The Worlds December 22, 2020 | Terry Applegate

Cuomo’s Partisan Authoritarianism Struck Down By SCOTUS... December 15, 2020 | Frank Vernuccio

Socialism: The Road-To-Hell Paving Company... December 15, 2020 | Roger McKinney

Amazon And The Los Angeles Lakers Wreck The Wage-Stagnation Narrative... December 15, 2020 | John Tamny

Capital Abounds, And It Needs A Place To Go... December 15, 2020 | David Bahnsen

How Companies Pay Shareholders: Buybacks Are Not A Giveaway... December 15, 2020 | Jerry Bowyer

Signs That Biden Will Be Soft On Iran December 10, 2020 | Frank Vernuccio

Join the conversation!
We have no tolerance for comments containing violence, racism, vulgarity, profanity, all caps, or discourteous behavior. Thank you for partnering with us to maintain a courteous and useful public environment where we can engage in reasonable discourse.