16 JANUARY 2025
Historically, when the US stockmarket has been valued at such high levels it has tended to de-rate via abrupt and substantial price declines.
Valuations can, however, compress to healthier levels in a more gradual, positive manner via stronger corporate earnings.
We could be on the verge of this more constructive scenario playing out.
Whilst early days, it seems “animal spirits” in corporate America have been sparked into life since the election.
The NFIB Small Business Optimism index has spiked at an unprecedented rate. So too have indicators measuring firms’ plans to raise worker pay.
The start of Trump’s first term, back in 2017, catalysed a similar trend, especially in the manufacturing sector with new orders surging during his first year in office.
The chart below shows how manufacturing new orders (red line) typically lead S&P 500 earnings growth (blue line) by around 12 months.
So any positive new orders trend would likely boost profit levels which, in turn, would help to justify at least some of the valuation premium that’s currently priced into markets.
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