The ongoing surge of earnings expectations is important to the market “narrative”, I assume. People don’t want to be short when estimates are being forced higher, I assume. But within the valuation framework that I prefer it is not really all that important.
What matters much more is that the macro backdrop continues to favor low earnings yields, which – crucially – are NOT a linear transformation of the multiple. We need to watch longer-term Treasury yields and any emerging threats to the low-volatility environment, not in the market itself, but in the macroeconomy.
What is good for the goose is good for the gander. The valuation bears have overstated their case, by focusing on the multiple. But we need to be consistent here, and not overstate the effect of an earnings surge, which actually has a pretty small effect on the yield, in the grand scheme of things. FH-180116