It appears U.S. stocks got far ahead of fundamentals. Since the 1950s, generally corporate profits and stock prices have been closely correlated.
There are two exceptions: the tech bubble in 2000 and today. Have stock prices divorced from reality and how long will this bull market continue? Probably longer than we would expect.
Central banks can have powerful effects on the stock markets. Their low rates cause yields on bonds goes down. Therefore, the yield on stocks looks more attractive by comparison, especially when the dividend yield exceeds interest rate yields. Conclusion: if low interest rates continue, stocks could remain more expensive than usual for a long time. And if the Fed keeps pumping liquidity into the system through repurchase agreements and other bond purchases, as it does currently massively, it could send prices even higher.
Another key factors are stock buybacks. Companies buying back their own stock is a real driver of share purchases today. These buybacks are starting to slow and if this trend continues, the bull market could be in trouble.
Stay cautious on U.S. stocks. Shares are expensive, but they could get more expensive for a while. It is not the time to go short but may be to reshuffle the portfolio.
An alternative could be other stock markets such as the emerging markets, which are finally starting to pick up. Emerging markets have underperformed big times over the past decade and it seems we are close to a reversal in this trend.
Sven Franssen