Multiples growing fastest since dot-com bubble as rally ages

Price gains of stocks in the Standard & Poor’s 500 Index are outpacing profits by the fastest rate in 14 years as the bull market extends beyond the average length of rallies since Harry S. Truman was president. More

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Multiples growing fastest since dot-com bubble as rally ages

BLOOMBERG NEWS FILE PHOTO/SCOTT EELLS
PRICE LEVELS on U.S. equity markets are outpacing profits and reaching multiples last seen when Harry S. Truman was president. Traders work on the floor of the New York Stock Exchange last week.
Posted 8/26/13

NEW YORK - Price gains of stocks in the Standard & Poor’s 500 Index are outpacing profits by the fastest rate in 14 years as the bull market extends beyond the average length of rallies since Harry S. Truman was president.

The benchmark gauge for U.S. equities has risen 14 percent relative to income over the past 12 months to 16 times earnings, according to data compiled by Bloomberg. Valuations last climbed this fast in the final year of the 1990s technology bubble, just before the index began a 49 percent tumble. The rally that started in March 2009 has now outlasted the average gain since 1946, the data show.

Bears say the failure of earnings to keep up with prices signals the bull market is in its last stages, as companies from Caterpillar Inc. and Danaher Corp. forecast slower profit growth and the Federal Reserve prepares to reduce stimulus. Optimists point to expanding multiples as proof individual investors are growing confident enough in the economy to return to stocks. History shows the final phases of rallies have provided some of the biggest gains.

“Markets have been running away,” Robert Royle, who helps oversee $21 billion as manager of the North American Trust at Smith & Williamson Investment Management LLP in London, said by telephone on Aug. 20. “Everyone is hoping for a second-half recovery in fundamentals,” he said. “I am just not sure what will drive the recovery.”

Labor market

The S&P 500 advanced 0.5 percent to 1,663.5 last week as global manufacturing and the American labor market showed signs the economy is improving. The index is up 17 percent this year, the largest advance over a comparable period since 1997, and climbed to an all-time high of 1,709.67 on Aug. 2.

The S&P 500 has risen 146 percent since bottoming in 2009. The 53-month gain has surpassed the average length of bull markets since 1946 by about four months, data compiled by Bloomberg show. The index gained 0.3 percent at 11:04 a.m. in New York today.

Combined profit at S&P 500 companies surged 37 percent in 2010, 19 percent in 2011 and slowed to 2.3 percent last year, Bloomberg data show. Earnings increased 3.6 percent and 3.7 percent in the first and second quarters. Analysts have cut projections for 2013 profit by 0.7 percent this year to $110.22, a 9 percent increase from last year, based on more than 11,000 estimates compiled by Bloomberg.

Dot-com crash

The last time gains in stocks outpaced profit expansion by this much was in 1999, when equity valuations surged 19 percent in a year to 30 times reported profit, according to data compiled by Bloomberg. That bull market ended the following year, with the S&P 500 tumbling 49 percent from March 2000 through October 2002 as the dot-com bubble burst.

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