Valuations are stretched, corporate profit margins are at record highs (can they go any higher?) inflation is falling and commodity prices are pointing to a significant fall in demand.
How long before equities fall?
The Fed’s preferred measure of inflation, the personal consumption expenditure (PCE) deflator, has been declining consistently for a year sitting currently at 1.1%. As CPI usually tracks PCE it is likely that the index will fall towards the 1% mark raising questions from markets on whether the US could fall into a deflationary spiral. The QE impact on markets may finally be coming to an end.
Agricultural commodities, oil and metals, have all been trending lower pointing to weak support from the overall economy. Copper, which typically tracks the S&P very closely, has finally broken down, just as it did in 2007.
With corporate profit margins at record highs it is far more likely that they will revert to the longer term mean rather than continue to expand as is predicted by most Wall Street analysts. Once earnings disappoint a mass re-rating could add substantial pressure to equity prices.
When the penny will finally drop is anyone’s guess but given the odds are increasingly stacked against equity markets and valuations no longer offer easy pickings investors might want to reflect on their equity exposures.