Well, the SP500, a laggard during this cyclical bull run,
closed at a record 1532 today. The Market Tracker has the
SP500 fairly valued at 1540 - 1550 through July. It appears
investors are still comfortable with a 17 p/e based on
rolling twelve month earnings and an inflation assumption
of roughly 3%. Measured yr/yr, the CPI has been running a
little below 3%, but the market has yet to show an appetite
to factor in a lower inflation rate.
SP500 consensus earnings are projected to rise 7.3% in 2007
and then crack the century mark in 2008, with a 12.6% rise
to nearly 106.00. Earnings acceleration is projected to
begin late in 2007 and carry over into next year, with
expectations for telecom and tech earnings leading the way.
Implicit here is a moderate acceleration of US economic
growth and decent global growth.
My inflation indicator has picked up some so far in 2007,
primarily because of a surge in US gasoline prices.
However, the indicator is still relatively quiet. Given
how commodities have driven inflation in this current
expansion, it is understandable that investors have a
conservative bent regarding inflation expectations.
The market's earnings / price yield has dropped to 5.9%.
The premium to the 91 day T-Bill is slightly over 100 basis
points, and the e/p yield premium to prime commercial
paper is a scant 65 basis points. The narrowing of these
spreads points to increasing market vulnerability to a
rise in short rates.
The SP500 price premium to the SP500 price level implied
by my monetary base model is rising significantly and
reveals growing market dependence on credit driven liquidity.
No problem so far, but risk from this measure is rising.
Keep in mind also that an acceleration of economic growth
coupled with even a mild pick up of inflation pressure can
rapidly use up the excess liquidity now being generated
through the credit window.
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