The main issue confronting equities seems to be that the Fed needs to tighten financial conditions in order to manage aggregate demand growth down to near the economy’s supply-side potential, which appears to be in a range of 1 ½ — 2%. In principle, equities need not contribute to that tightening, but it seems aggressive to assume that they will not, particularly with valuation arguably full.
However, valuation is not itself a major concern here. On my metrics, equities are fairly valued or indistinguishable from fairly valued, as I reiterate – with an update – in this note.
