The Great 2020s Equity Opportunity

Comments Off on The Great 2020s Equity Opportunity
The Great 2020s Equity Opportunity

In a nutshell, the Trends editors believe that we are in the middle of a cyclical bull market driven by liquidity.  That market cycle is playing itself out in the context of a secular bull market driven by technological innovation.  The cyclical bull market may run for another year or more before suffering a relatively brief correction.  On the other hand, the secular bull market is likely to last at least another 10 years and resemble the secular bulls which began in 1950 and 1982. 

Contrary to what you’re hearing from many corners, forward valuations of equities are still fairly cheap, especially when compared to other asset classes.  Earnings per share will continue to grow on average because, as we explained in trend #1, the underlying economy is in far better shape than most people realize and this provides a solid foundation for a business rebound.

As a result, we remain cautiously optimistic about stocks in the short-term and very optimistic about them in the long-term.

Let’s examine these conclusions and see why they make sense.  We’ll start with valuations

To make the case that stocks are “overvalued” and “probably in a bubble,” today’s skeptics rely upon trailing valuations, specifically P/Es based on recent earnings.   This argument ignores the fact that the market is a discounting mechanism that is trying to properly price future earnings; past earnings don't have much relevance to stock prices except for guiding estimates of future earnings.  When we invest our money in a stock, we don't invest because of how much money the company made in the past; we care about how much money we think it will be making in the future.  That is, we want to share in the company's future profits.

Consider the situation in early 2009. The S&P 500 index bottomed at around 750 while the 12-month trailing earnings for the index came in at $8 per share. This resulted in a trailing P/E of 100, which implied that stocks were extremely expensive by historical standards.  That was because we were in a deep recession and many companies in the index reported either a loss or razor-thin profits.  However, the forward P/E told a different story.  The companies making up the index were expected to earn $75 per share in the next year, which meant that the forward P/E of the index was 10; this indicated that stocks were extremely cheap.  And, buying stocks in early 2009 turned out to be a very smart decision.

Now, fast-forward to 2021 when we are again seeing a market with a large gap between trailing P/Es and forward P/Es.  Currently, the S&P 500 sits at roughly 3,750 against trailing earnings of $135 per share and forward become a paid subscriber for full access.
Already a Trends Magazine subscriber? Login for full access now.

Subscribe for as low as $195/year

  • Get 12 months of Trends that will impact your business and your life
  • Gain access to the entire Trends Research Library
  • Optional Trends monthly CDs in addition to your On-Line access
  • Receive our exclusive "Trends Investor Forecast 2015" as a free online gift
  • If you do not like what you see, you can cancel anytime and receive a 100% full refund