Thursday, August 15, 2013

Guggenheim Warns- Multiple Expansion Is Not Sustainable

You may have seen this article/research posted at Zerohedge.

Multiple Expansion Driving the Rally in U.S. Equities

The P/E multiple, defined as the ratio of price to trailing 12-month earnings, has been the main driver of the rally in U.S. equities over the past two years. The S&P 500 index has increased by over 34 percent since the beginning of 2011, of which 28 percent has come from multiple expansion. During the same period, growth in corporate earnings has slowed. The trailing 12-month earnings for S&P 500 companies rose 2.4 percent in 2012 and another 2.5 percent for the first seven months of this year, registering the slowest earnings growth in non-recession years since 1998. Without renewed earnings growth, a continued rally in stocks driven by multiple expansion may be not sustainable.

This is interesting for a myriad of reasons, one of which being the implication of future returns following price appreciation generated by multiple expansions versus earning expansions. I smell some research ahead. 

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