For market commentators who rely on forward earnings forecasts, the market isn?t as cheap as it looks.
According to David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, this is made evident when incorporating cyclically-adjusted corporate earnings in ?real? terms, which shows that stocks are roughly 20% overvalued, even after the recent correction.
As a result, he anticipates stocks will trade down to valuations in line with the end of secular sideways markets. In other words, a price-earnings multiple of 12x and a dividend yield of at least 4% for the S&P 500.
?So we very likely have quite a long way to go before we can safely assume that the secular sideways process is complete and we are into an entirely new bullish chapter,? Mr. Rosenberg said in his daily Breakfast with Dave report.
He noted that this secular sideways phase for stocks began in 2000 as major averages peaked in real terms. As a result, equities are probably two-thirds of the way into a cycle that typically lasts 16 to 18 years.
?This by no means suggests that we cannot get periodic rallies along the way, but in a secular sideways market, these rallies are to be rented, not owned,? Mr. Rosenberg said.
Even if a ?fiscal cliff? is avoided, he believes the chances of a growth relapse in 2013 are higher than the equity market has priced in, adding that Treasuries appear to be the asset class that most closely shares this cautious view.
With the output gap at nearly 6%, Mr. Rosenberg expects U.S. unemployment will remain near 8%, suggesting inflation and interest rates will remain low for a sustained period of time.
The strategist said that means ?a stock market priced for peak earnings in 2013 could be in for some pretty big disappointment,? adding that recent guidance during third quarter earnings season has already started to show this.
Source: http://business.financialpost.com/2012/11/06/rosenberg-says-stocks-20-overvalued/
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