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The current stock market boom is based on fundamentals, not bubble PE ratios: Rational exuberance!

Posted by John T. Reed on

Time and again in recent decades, the stock market was soaring. Why? Because of some stupid bubble like dot-coms or Sub-prime mortgages. Then it would burst costing the investors billions if not a trillion dollars.

It’s setting records again. Another bubble?

Better performance, not lower expectations

Apparently not. Normally, bubbles are manifestations of rising price-earnings ratios. That’s stupid. It means investors are accepting lower earnings per dollar of stock value, not that the companies are doing well.

In real estate investing, that is called cap-rate compression. Prices go up because stupid investors start accepting lower rates of return. Why would they be so stupid? Because the stock price or home price is going up and investors love that and they do not want to know that it is for the wrong reasons.

Amazon and Tesla are still at stupid valuations

Amazon and Tesla are still at stupid price-earnings ratios, but their fan boys will make excuses and search for some metric, any metric, that makes those companies look good, like left -handed, inside-out, full-moon, cash available. Then whatever off-the-wall metric “proves” Amazon deserves to be high priced is the only one we should focus on and price-earnings ratios are passe. “This time is different” is the mantra of these morons.

Actual earnings

But the current bull market IS different. It is based on rising EARNINGS (other than at Tesla). In other words it is not price-earnings ratios that are going up—sign of a balloon. It is earnings! Who’d a thunk it?

Is this a fundamentals-based boom? To a large extent, yes. What fundamentals? Tax cuts and deregulation, rising dollar, GDP growth. What about the trade war? This is happening in spite of the trade war, not because of it. And earnings are up because sales are up, not cost cutting.

Is everything perfect?

Are there any clouds on the horizon? Yes, the rising national debt, lack of workers, a too-low birth rate, rising inflation, the trade war.

Population and productivity growth are needed for the long-term

The main message is that this stock market boom, unlike so many recent ones, is not a bubble boom. That does not mean it won’t end. Sales and earnings growth generally end at some point. Growth fundamentally comes from population growth and/or productivity increases. We have neither at present. Our current growth is like the growth in China. It comes from Trump taking the government’s boot off the neck of the economy. If Trump wants long-term growth, he needs to encourage immigration and the investment that improves productivity. Tax cutting and deregulation are one-time stimuli. Actually there are far more regulations and laws to cut, but ultimately you run out of other party’s laws and regulations.


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