This column originally appeared on Real Money Pro
at 8:56 a.m. EDT on May 20.
NEW YORK (
Real Money) -- This morning's opening missive summarizes my previous and current market views and attempts to deliver a mea culpa as to why I have been so wrong in my outlook.
Upon reflection, being wrong in my outlook has been a gross understatement -- as in my career, I rarely have been as mistaken as I have been thus far in 2013.
Valuations Rise in Lieu of Little Real Economic Improvement
The most frustrating part of this year was that my macroeconomic concerns have been relatively accurate. What I missed was the market's willingness to revalue stocks higher even in the face of flat sales, only about a 2.5% increase in corporate profits and with the vulnerability to profit margins at 75% above the long-term average.
P/E started the year at 13.7x and now stands at over 16x. In part, this revaluation has been a function of first-quarter earnings having come in slightly better than expected -- not by much, maybe about $0.75 a share. If we assume that S&P earnings this year will be about $103.00 a share (or about a $3.00 upward revision from my prior baseline estimate), in theory this should produce only about a $48 lift ($3.00 x 16) in the S&P 500's value, not over 200 points that has been already recorded.
If you look at the methodology of my
fair market value
calculations for the S&P 500, I had mistakenly thought (in all four scenarios) that P/E multiples would remain below the five-decade average (of approximately 15.0x) given the projected weakening domestic economic growth, China's decelerating growth trajectory, Europe's lingering structural debt problems and a general continuation in the global deleveraging process, among other issues.
Money Printing Is Viewed as a Panacea
With the S&P now at 1670, the market advance has been dramatically more than might be justified by a modest rise in profit expectations. The answer, of course, is a global monetary easing that has reduced the fixed-income alternatives, resulted in the perception that tail risk in Europe has been all but eliminated and put a damper on risk asset price volatility. Some of this I had expected, but the magnitude of the stock market response to the weight of lower interest rates and liquidity had not been anticipated by me in the face of the aforementioned challenging top-line revenue prospects and a generally lackluster profit picture.