Stocks are not cheap. Between them, these charts tell us two things based on the fundamentals. From the first chart, even if earnings recover as analysts expect, the market is currently very expensive based on those expectations. For the market to outperform, earnings have to recover even faster. From the second chart, even if that recovery happens, the market still remains very richly priced based on history. In other words, whether you look at the past or the future, right now stocks are not cheap.
When Will We Return To “Normal”?
That is the context we need to think about when we consider what is next. We will keep making progress on controlling the virus, but setbacks are likely at times. The economy will open and recover, but it might be slower than markets expect. This is the foundation of where we are right now.
The market, however, expects faster progress. Earnings growth is expected to resume in the first quarter of next year, which will require that the virus be under control, that the economy be open, and that consumers go out and spend money like they did in 2019. That expectation may be optimistic. In the best of all possible worlds, current prices make sense. In this world, we should expect more volatility.
Real and substantial progress has been made in both controlling the virus and supporting the economy until it opens again. We know what to do, we are doing it, and it is working. We will get back to something like normal—and likely in a shorter time than some fear. Still, we are not done yet, and there is still substantial progress that needs to be made before we can declare victory. The markets are very confident, and I hope they are right—but let’s not get ahead of ourselves.
Brad McMillan is the chief investment officer at Commonwealth Financial Network.