Do Equities Have a Valuation Problem?

We’re officially in recession, with the prior peak dated at February. We think this month is the trough. Equities are almost back to the highs, as has happened at the trough of five of the ten post-war recessions. Risk-adjusted valuations are getting stretched, with the equity risk premium having reverted from 2009-type highs to the post-GFC mean and below, approaching the post-GFC record. At economic turning points, equities often get ahead of earnings. There have been almost no earnings estimate upgrades yet. Forward earnings appear to be rising slightly because the present terrible quarter is rolling off. The presidential election remains a risk for markets. But upgrades are coming as a V-shaped recovery takes hold. When the present quarter is done, it will become the comparable supporting astonishingly high growth estimates. This will support the sectors that are furthest from recouping their losses.