Stocks ‘supremely overvalued’: economist

U.S. stocks are “supremely overvalued” — the most so in 15 years — according to David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates.

While many in the investment community are quick to point out that operating earnings from U.S. companies are beating expectations by a wide margin, and the 14.5 per cent year-over-year gain marks the strongest performance since Q3 2011, Rosenberg thinks that masks what’s really going on.

Earnings are at a record high; since the most recent peak almost three years ago, the S&P 500 is up 22 per cent, yet profits have climbed only seven per cent.

“At that time, one could reasonably have said the stock market was fairly valued,” the strategist said in his daily Breakfast with Dave report. “But since then, with price returns tripling profits, the market is now supremely overvalued.”

Rosenberg also highlighted the fact that earnings are “woefully” below the estimates analysts were forecasting years ago. In early 2014, the S&P 500 consensus earnings forecast for 2015 was US$133. Fast forward to 2017, and earnings per share are still roughly US$10 below that level. Meanwhile, the current consensus for this year is US$132 — right where it was two years ago.

He added that despite profit forecasts being unchanged during this period, the stock market is up 17 per cent.

With forward estimates now moving down, Rosenberg stressed how important this shift is, as the market moves on changing expectations, rather than past developments that have already been discounted.

He believes that explains why major averages have flattened for the past three months or so, despite the “massive bullishness constantly being espoused” by market pundits on television.

He recommends focusing on companies with proven earnings visibility and low variability, higher quality names with strong balance sheets, in addition to reducing exposure to stocks with above-average cyclical sensitivity.