Tuesday, June 4, 2013

Bernstein on Market Multiples and Corporate Profits

Bernstein's global equity strategist Vadim Zlotnikov gave a terrific presentation in New York last week on the state of the market.

Two charts in particular stood out in his talk, in my opinion.

Vadim pointed out that over 90% of the market's gains over the past year have been because of multiple expansion. Investors are paying higher prices for earnings as confidence in continued economic growth continues.  In addition, low interest rates on bonds has driven down the required earnings yield on stocks.

The second chart that caught my eye was Vadim's comments on profit margins.

A number of other bearish strategists - most notably, GMO's Jeremy Grantham - have been arguing that stocks are vulnerable because corporate record high profit margins are unsustainable.

However, Bernstein's work suggests otherwise, as Vadim's chart shows:

While there is no arguing that the length of the current rally would seem to make it vulnerable to a market correction in the near future, a more serious market downturn seems unlikely so long as credit conditions remain favorable and revenue trends positive.