The huge valuation gains in stocks during the current bull market have nothing to do with an honest marketplace, and the cheering on Wall Street is bound to be replaced by tears, according David Stockman, White House budget chief during the Reagan administration.
Stockman estimates fourth-quarter S&P 500 earnings are actually down 5 percent from the year-ago period, but there has been little mention of that fact in media coverage.
"That's because the talking heads invariably reference 'adjusted' or 'ex-items' earnings, which, almost by definition, exclude charges for every imaginable business mistake and bonehead executive action — such as soured M&A [merger and acquisition] deals and 'restructuring' expense — that could possibly cause earnings to go down,"
Stockman wrote on his Contra Corner blog.
In his view, the most dangerous truth is that U.S. stocks have experienced a "tremendous inflation" of price-earnings (P/E) multiples in the past few years in anticipation of the economy hitting escape velocity — a would-be happy outcome that has resolutely failed to materialize.
Stockman blames the Federal Reserve for helping fuel the expansion of stock valuations by printing mountains of money to try to fuel growth. He says the outcome has been that stock valuations have grown five times faster than company profits have, causing P/E multiples to soar from 13.5 times earnings in 2011 to nearly 20 times earnings today.
In other words, to say that stocks might be seriously overvalued could be an understatement.
In his view, 73 straight months of zero-interest rate policy (ZIRP) is neither normal nor sustainable, nor is the rock-bottom 1.8 percent rate on the benchmark 10-year Treasury note.
"Indeed, the fact that the last Fed policy rate increase — a mere 25 basis points — occurred 10 years ago is utterly abnormal, even freakish by the standards of prior history," Stockman noted
"What is quite certain . . . is that the huge P/E multiple expansion of the past three years has nothing to do with honest price discovery. It is the bloated and unsustainable result of central bank driven inflation of financial asset prices and the relentless waves of carry-trade gamblers buying on the dip," Stockman said.
"At some point soon the last home gamer will be led to the slaughter. Then the ultimate deflation will happen as P/E multiples shrink back to reality."
According to
GaveKal Capital, signs of distress in the U.S. economy are starting to accumulate.
GaveKal compared a recent decline in the bellwether durable goods orders figures against the Citigroup Economic Surprise Index, which it uses to track all economic data.
"The moving sum peaked in February 2014 and has been declining since. In looking back over the last 10 years, we've never seen such a big divergence in the direction of these two series," GaveKal said on its blog.
© 2025 Newsmax Finance. All rights reserved.