This is a lie.
There has been a bull market in corporate earnings. But these gains are not reflected in stock prices. People are paying less-and-less for every dollar of earnings ever since 2000. Thus the market has been treading water — sometimes a bit up, sometimes a bit down.
The ratio of a stock’s price to its earnings per share, sometimes called the P/E ratio or earnings multiple — was at record highs before the Dot-Bomb. It has since fallen to around near its historic median of 17. (Chart courtesy The Big Picture.)
This is called earnings compression. This is not the sign of a bull market, but a bear market.
Look at the right side of the chart. See what was happening in the 1990s? People were paying more-and-more for each dollar of earnings. That’s a bull market. See what has been happening since? They have been paying less-and-less. That’s a bear market.
Oh, with interest rates rising, earnings compression should continue.
Why? A 5% bond is a P/E of 20 — you pay $100 to get $5 every year, and
100 divided by 5 is 20. A 6% bond has a P/E of about 17, a 7% bond a
P/E of about 14, and a 10% bond a P/E of 10.
If that’s what you get for relatively low risk, you should get a higher
return for the higher risk of stocks. Thus the P/E of stocks should
fall when bonds rise, and stock prices should fall.
A lot of what has been happening has been hidden from view by the
extremely low interest rates of the last decade. A 4% bond has a P/E of
25, a 3% bond a P/E of 33, so as you can see with loan rates low stocks
or real estate have been the only places to go.
The historical relationship between stock and bond prices is being
re-established, historical patterns are being re-established, and if
you thought the last five years were a bear market for stocks (as I
do), well you haven’t seen anything yet.