Bring Back the ‘Fed Model’ For Stocks? Nope

by Jeffrey P. Snider
Alhambra Partners

A few days ago I examined the relationship between the stock market PE and CPI inflation. The reason was the sudden renewed emphasis on low inflation in the context of trying to justify increasingly outlying earnings multiples in stocks. Earnings fell sharply in 2015, but prices really didn’t; there was, at most, only more volatility spread across sideways trading (even including recent record highs). EPS haven’t as yet recovered and there are growing signs that risks to the earnings recovery have only increased, not decreased. By simple math, then, stocks are trading on very shaky ground at already high multiples and greater uncertainty that it will all be corrected naturally by the any-day-now thriving economy; leaving prices as the more likely motivated method for convergence.

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