Is the Stock Market Tempting Us with Another Breakout?
Crescat Capitals commentary for the month ended June 2021, discussing that the US stock market is at risk of P/E deflation. The US stock market is 51% overvalued and at risk of a 34% decline. The catalyst is inflation which has arrived in spades and is likely to stay for a while. We think shrewd investors should be getting positioned now for the Great Rotation to both protect against and profit from this critical macro shift. Inflation is likely to be one of the defining characteristics of this decade, and anything but short-term, as the Feds recent spate of transitory bluster would have trusting souls believe. An enduring trend of rising wholesale and consumer prices is likely to topple todays stock market by deflating its historically high price-to-earnings ratio. For proof that inflation deflates P/E multiples, look at the strong relationship between CPI and the earnings yield (inverse of P/E) of the S&P 500 Index over the last seven decades of data in the chart below.