Normalized EPS

One never appreciates what he or she has until it’s gone. In our case, during the many years it was freely available, we failed to appreciate the zero interest rate. Now that it’s gone, we already feel pressured to join a game where we (and very few others) have any edge: Fed-watching. Our real edge is that we recognize this.

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Call off the mortician, and bring on the pediatrician for the bull market’s 7 1/2-year checkup this month.

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While the most inflated domestic-valuation readings are found in the Large Cap realm, the market rebound has driven the median 12-month trailing P/E in our Small Cap universe to 22.5x (Chart 1)—less than a point away from the June 2015 all-time high of 23.3x.

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If the current global bear market manages to shake investors’ blind faith in central bankers, this decline might actually accomplish something in the long term. But breaking that faith will take awhile.

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Foreign stocks’ perpetual underperformance has opened up a valuation gap that should look extremely appealing to anyone with a horizon of more than two years. But proceed with caution.

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We examine Emerging Markets from both the top-down and bottom-up perspectives as we try to identify where to move and what to expect. We check in on two successful EM thematic group ideas as well.

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We’ve lately made it a January tradition to publish a “Rear View Mirror” forecast for S&P 500 returns out to the end of this decade.

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S&P Normalized valuations are already in the zone that have defined many important bull market tops.

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From our perspective as disciples of Normalized EPS, the entire bull market to date has come from P/E expansion. However, that stands to change as global Normalized EPS are again on the rise.

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Year-ahead stock market forecasts are now in hot demand, but of course are notoriously off the mark most years. Very long term forecasts (say, out to the end of the decade) are in virtually no demand, but are considerably easier to get close to the mark for those armed with the right tools. 

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MSCI Index very undervalued, as the recovery off the March 2009 lows has left valuations still near prior bear market lows. Relative to foreign markets, the U.S. looks expensive. This is why we continue to maintain a healthy exposure to foreign stocks…especially emerging markets.

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While most are content to make annual predictions at this time, leave it to Doug Ramsey to bite off an even bigger piece…predicting the next DECADE.

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There is a potential valuation ceiling confronting U.S. stocks. 2002 S&P valuation lows may be the point that this cyclical bull market tops out.

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Given the very long-term ebb and flow of market valuations, it is hard to believe that—with old valuation norms finally and decisively violated to the downside—the market will spring back to anything like the valuations seen in the middle of this decade.

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· The U.S. is leading the foreign markets, but for how long?

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Materials sector has fallen fast and hard in our GS Score rankings and is now the worst rated. Still see further downside based on valuations and technical factors. No, we do not think the underlying commodities can outperform while the stocks fall.

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Comparing and contrasting our traditional Major Trend Index and the Global Major Trend Index. Both are now Neutral, but the Global version is showing better valuations and worse technical scores.

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A look at the relationship between bond and stock yields as justification for today’s expectations of a continued bull market and for the current LBO craze. No evidence that Fed-type valuation models help forecast future market returns.

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Earnings are rebounding strongly. S&P operating earnings estimates are up 21% from 2001 to 2002, and up 23% from 2002 and 2003. Severe cost cutting may not be fully factored into analyst estimates. Look for upside earning surprise.

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