A look at economic indicators
Last Wednesday and Thursday I shared my outlook on stocks ("constructive") and bonds ("neutral"). Today, I'd like to take a look at the major economic indicators – starting by sharing some charts from Charlie Bilello's latest Week in Charts blog post...
Regular readers are familiar with Bilello. He's the chief market strategist at wealth-management firm Creative Planning. And I often share excerpts and charts from his Week in Charts blog here in my daily e-mails.
Most importantly, as Bilello notes in his latest post last week:
[This] is by far the longest period of prosperity in U.S. history (17+ years). There hasn't been a real downturn and credit default cycle since the global financial crisis and recession that ended in the middle of 2009.
Here's the data he shared – going back to 1949:
Earnings from S&P 500 Index companies are soaring. As Bilello showed in the chart below from a post earlier this month, they're projected to rise by a stunning 34% this year – and are currently at an all-time high:
In this next chart from his post last week, Bilello shows that job creation is decent:
Meanwhile, the unemployment rate has dropped to 4.1%. It's down from 4.5% last November and well below the long-term average of 5.7%. Take a look at this next chart from Bilello:
As this next chart shows, the unemployment rate has been below 5% for five full years – the longest stretch in half a century:
Therefore, it's not surprising that stocks have performed spectacularly well. As you can see in this chart, they've risen 315% (15.3% compounded annually) over the past decade:
So why am I merely constructive on stocks rather than pounding-the-table bullish?
Two reasons...
The first relates to the concerns I've expressed many times (most recently here, here, and here) that the AI infrastructure boom that accounts for a substantial portion of corporate earnings and GDP growth has entered bubble territory.
And if it bursts, it's hard to tell how widespread the fallout could be.
My other major concern is that, by most measures, valuations are at or near all-time highs. Here's Bilello's chart of the Shiller cyclically adjusted price-to-earnings ("CAPE") ratio:
And take a look at this chart from Multpl.com of the S&P 500's price-to-sales ratio. As the chart shows, this ratio is currently 3.78 times – more than double the average over the past quarter century:
Also consider the "Buffett Indicator"...
It's the ratio of the stock market's total value divided by U.S. GDP – which Warren Buffett said in a Fortune interview in 2001 is "probably the best single measure of where valuations stand at any given moment."
As this chart from LongtermTrends shows, the Buffett Indicator is at an all-time high:
Meanwhile, at 1.06%, the S&P 500's dividend yield is at an all-time low. You can see it in this next chart from Multpl.com:
The only valuation metric that's not at or near an all-time high is the price-to-earnings (P/E) ratio. That's thanks to such strong earnings growth shown in the chart above.
As this 150-year price chart from Multpl.com shows, the S&P 500's current multiple of trailing earnings of about 26.2 times is high – but not exceedingly so:
And the multiple drops to about 19.1 times if we believe forward earnings estimates (a big "if," to be sure) – as this chart from MacroMicro of the S&P 500's forward P/E ratio shows:
In summary, valuations are high, but not completely in nosebleed/bubble territory. So as long as the U.S. economy and corporate earnings remain strong, I remain constructive on stocks.
To repeat what I wrote last Wednesday:
My broad advice remains the same...
Have modest expectations – for example, I'd guess that the S&P 500 will compound at 5% annually for the next five years. But if you own well-diversified index funds like the State Street SPDR S&P 500 Fund (SPY) and/or modestly valued stocks of quality companies, then stay the course.
Meanwhile, I'm still finding special situations to take advantage of in this environment...
In fact, the same trade that made me a millionaire back in 1999 is finally reopening again.
Put simply, a dramatic shift is coming to the market. One group of stocks is poised to take over market leadership from the AI darlings.
And as all this plays out, it could lead to multiple 500% to 1,000% winners as big-name AI stocks fall behind.
I shared all the details during a special on-camera event last week. If you missed it, you can still check out a free replay here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.