Daily Local News (West Chester, PA)
The U.S. stock market
Why it’s so high: Corporate profits are climbing again, and analysts expect earnings for S&P 500 companies to rise 10 percent to a record this year after stalling or falling the last two years.
Revenue growth is also stronger for companies, which offers a more sustainable and healthier route to gains. For years, businesses depended instead on cutting costs and buying back their own stock to squeeze out more earnings per share.
If Washington is able to cut tax rates, as Republicans have promised to do, profits could be set for an even bigger bounce. And stock prices, at their heart, reflect how much profit companies are producing or will.
What could trip it up: Price tags are high.
This most recent quarter notwithstanding, companies’ stock prices have been rising faster than their profits. When measuring the S&P 500 against its expected earnings over the next 12 months, stocks have been this expensive just 1 percent of the time over the last 10 years, according to Jack Ablin, chief investment officer at BMO Private Bank.
Another way to measure stock prices popularized by Robert Shiller, a Nobel prize winner in economics, looks at how much companies have earned over the prior 10 years, in hopes of smoothing out the effects of boom-and-bust periods. That measure says the S&P 500 is at its most expensive level since the dot-com bubble was deflating in 2002.