Leuthold CIO: $17 Trillion Bull Market Returns 'Abysmal'

Corporate Maneuvers

“You’ve had all these machinations between minimizing tax liability, keeping interest expenses down and dramatically shrinking the share base to get to this trailing 12-month reported earnings number of $102,” he said. “Yet despite all those maneuvers, you’re still short of where we should be.”

Even if profit growth is falling short of its potential, there’s nothing in conventional valuation measures such as price-earnings ratios to suggest stocks are about to plunge, according to Siegel.

At 20.7 times annual profits, the S&P 500 trades above its historical average of 17.1 since 1936. But it’s lower than its average level of 24.9 since 1990 and 21.3 since 1980, data compiled by Bloomberg and S&P Dow Jones Indices show.

“People just look at the last five, six years and think it’s been a big rally, and that has to make it overvalued, but that’s the wrong way to look at it,” Siegel said. “This is a correction from the most severe bear market in 75 years and a tremendous undervaluation. The price-to-earnings ratio is not appreciably above its long term average.”

Consistent Gains

Stocks advance at a consistent rate because so does the economy, said Dan Miller, director of equities at GW&K Investment Management in Boston. U.S. gross domestic product has expanded 6.6 percent a year since 1946, while S&P 500 earnings have climbed at an annualized 7 percent, according to data compiled by Bloomberg and S&P.

While profit growth for S&P 500 companies will slow to 1.2 percent in 2015, tempered by sinking oil and a stronger dollar, the pace will rise to more than 10 percent in the next two years, according to analyst estimates compiled by Bloomberg.

GDP will expand at least 2.7 percent a year through 2017, economists’ projections show. That’s up from the average rate of 2.2 percent since 2009, the weakest recovery from any recessions since World War II.

“I look at U.S. stocks as very fully priced,” said Robert Arnott, the chairman of Research Affiliates in Newport Beach, California, and a pioneer in the field of fundamental indexing. About $170 billion is managed using his firm’s investment strategies. “Do I view them immediately vulnerable and dangerous? No. I view them dangerous for long-term investors.”