S&P 500 Rising At Five Times GDP Shows Recovery Priced In

“The modest economic growth is a recipe for continued run-up in equity prices,” Rudderow, whose firm oversees $1.6 billion, said by phone. “Once we get a hint that the Fed begins to reconsider their position on interest rates, that’d be the time when the equity market will be more challenged.”

Just as lackluster demand has made company executives hesitant to boost capital investment, their reluctance to spend on new plants and technology in turn held back the economy. CEOs have cut the proportion of cash flow used for capital spending to about 40 percent from more than 50 percent in 2002, data from Barclays Plc show.

Capital Spending

Capital spending may be little changed next year as lower oil prices limit investments by energy producers, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist, who derived the data from more than 670 non-financial companies that the firm’s analysts cover.

“We’re already at a market price that’s greater than what GDP growth can sustain in the next seven to 10 years,” John Allen, chief investment officer at Aspiriant LLC in San Francisco, said in a phone interview. The firm oversees about $8 billion. “Equities will either be choppy or come down.”

After buying stocks indiscriminately in 2013, investors are punishing companies now that fail to deliver growth. International Business Machines Corp. and Coca-Cola Co. tumbled at least 4.3 percent last week amid disappointing sales. IBM has spent $19 billion buying back its shares in the past 12 months and Coca-Cola plans to repurchase between $2.5 billion and $3 billion of its stock this year.

Profit Margins

IBM, grappling with an industry shift to cloud computing, reported a 10th straight quarter of revenue declines and abandoned its earnings forecast for 2015. Coca-Cola, the world’s largest beverage maker, missed analysts’ sales estimates and its $3 billion cost-cutting plan failed to satisfy investors.

The boost to earnings from plant closures and layoffs has lessened over the past two years as profit margins near a record 9 percent, data compiled by Bloomberg show. At the same time, buybacks are losing their allure. The S&P 500 Buyback Index is up 7.5 percent this year, compared with the 6.3 percent advance in the S&P 500, after beating it by an average of 9.5 percentage points every year since 2009.

“This past couple of weeks should serve as a good wake-up call for investors that the market going forward is unlikely to be as smooth as it was,” said Leo Grohowski, chief investment officer at New York-based BNY Mellon Wealth Management, which oversees about $187 billion. “The overshoot to the downside of the market has been corrected. With valuations back to fair levels, you’re not going to see this degree of dispersion.”