U.S. stocks are still overvalued
All the news about China and the Federal Reserve rate cuts may be clouding the bigger stock market picture, said John Authers. “The political possibilities are endless,” and it’s tempting to try to game out whether the trade war will escalate. But whatever happens with the political winds, there’s a “massive overvaluation” in U.S. assets. U.S. companies are much more highly valued than those in the rest of the world, relative to their earnings. “Why is the U.S. doing so well despite the concern about a flagging economy?” It’s not just low interest rates. The main reason is that U.S. companies’ earnings have been rising at a steady clip. On the surface, this is fine. “But should we really trust those earnings?” Companies do a lot to smooth out their earnings reports. Right now, the earnings per share that U.S. companies report to their investors have raced way ahead of the real profits calculated by government economists. That’s a red flag that earnings may be experiencing “some kind of bubble.” Many companies are “talking down their prospects.” Investors should take note. Earnings appear to be overstated and face a troubled immediate future. The valuation measures don’t tell us about specific timing, but they do show a stretch of poor stock market performance ahead.