Shiller Doubts Booming Earnings, Now Propelling the Market, Will Last

Yale professor sees stocks as way overvalued and thinks investors are fooling themselves about continued increases.

Recent boffo earnings get a doubtful view from Robert Shiller, the Yale professor and Nobel Prize winner. He doesn’t think they will last.

As a result, Shiller told CNBC Tuesday, it’s a “risky time” because the investing public has lost its skepticism about the US stock market, which he termed the world’s most expensive. His own measure of stock valuations, the Cyclically Adjusted PE Ratio for the S&P 500, now stands at a lofty 33.

This gauge, called CAPE, which adjusts earning for inflation over the past 10 years to get a smoother trend, is far above the conventional price/earnings ratio for the broad market index, which is a nonetheless elevated 24. (The historical average is 15.)

Investors believe the current market boom will last a good long while, he declared, although he added that there was no forecasting how long that could be. “Right now, it is kind of a Trump narrative that’s supporting our faith in these earnings numbers,” he said, “even though you know historically strong earnings growth has generally been reversed before too long.”

In the second quarter, the S&P 500 recorded a 24.8% boost, its second-strongest earnings growth since 2010, when a post-recession surge buoyed the market. This year’s first quarter was slightly higher.

Analysts expect third quarter 2018 growth to be 19.3% and the fourth period’s earnings to rise 17.3%, according to FactSet.  And next year, they look for further slowing, although coming in at a still healthy 10.3%.

“Investors believe that this boom is going to last, or at least that other investors think it should last, which is why they are bidding up stock prices in a dramatic response to the earnings increase,” Shiller recently wrote.

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