Guest post by thinkofanamefast
Market profit margin ratios are around 10% vs perhaps 7% historically. Combined with PEs being high (although Birnyi associates has 17 for 1 year forward (not bad but a lot due to tax cuts, repatriation, and oil comeback). Trailing 12 mos p/e is 24…way high. CAPE way high also but still somewhat due to economic collapse years ago.
So since everything reverts to mean eventually (?), including profit margin ratios and p/e ratios, and since int. rates rising, and unemployment low which may result in wage gains and lower profits…is the outlook for stock prices as good as it is for the economy? Lower profit margins plus lower p/es (reverting to historical mean) would be a double whammy, in that lower profit margins would require higher p/e for stocks to even stay where they are. Or is there some reason profit margins and p/e will stay elevated permanently- a “new normal”?www.yardeni.com/pub/sp500margin.pdf
and this, maybe CAPE is not mean reverting, or maybe it is. aswathdamodaran.blogspot.com/2016/08/mean-reversion-gravitational-super.html