Over the past 20 years, and especially since 2009, the Federal Reserve has been using the stock markets as a way to mask the underlying insolvency of the general economy. It is why every business media outlet and segment pushes what the Dow, S&P, and Nasdaq did on a given day, while minimizing the fact that corporate earnings have declined en masse over the past decade.
So, in the name of history, let us briefly examine some of its most important economic factors and how they apply to current market conditions. The present S&P 500 price to earnings (P/E) ratio is 26.52, as opposed to the historical median average which is 14.65. Perhaps more importantly the Schiller P/E is presently 29.27, when the median average is only 16.09. Ironically, 29 is the level the market hit on black Tuesday 1929, right before the great depression of the 1930s. Furthermore, the Schiller benchmark is now well above the 25 level the Shiller PE hit before the great recession in 2007.
Possibly, most troubling is the S&P's price to sales ratio which is 2.08 a level not seen since the dotcom boom and subsequent bust of course. On average companies that make up the S&P 500 are being valued at more than 2 times sales. This is extremely ambitious and clearly indicates that share prices are appreciating much faster than companies are growing their revenues. The phenomenon we are observing now is somewhat reminiscent of the late 1990s. However, unlike in the late 90s when the U.S.'s GDP was growing at approximately 4.5% now the U.S. economy is barely averaging 2%, huge difference indeed. So, a logical question would be why are we seeing such a drastic appreciation in risk asset prices if the growth is simply not there to support it. - FX Street