- The bull-market case is hard to accept, given today’s lofty valuations.
- Plausible earnings growth, however, could propel the Dow to 140k over the next quarter century.
- Let’s maintain an open mind to all market outcomes, including the secular-bull-market case.
Want to be run out of town? Show this chart to your colleagues.
Yes, I know. Outlandish projections are the stuff of tops. And the market is due for a breather. But none are touting Dow 140k. And what did we know in 1940 or 1982, eight years past the big 20th-century bottoms? Hint: not much.
Sure, valuations were “attractive” in those days. But only from our modern vantage. In real time, there were good reasons for single-digit multiples and double-digit yields.
Today’s valuations are undoubtedly rich. But P/E multiples – however concocted – have denominators as well as numerators. What are the prospects for corporate earnings?
Nominal earnings have grown at a 6.7% annual rate in the post-WW2 period. An advance to Dow 140k by 2042 would require 7.5% annual growth, assuming a terminal P/E ratio of 25x. This is a tall order, but not out of the question. Earnings logged 7.4% annual growth, for example, from 1982-2007.
What might cause a repeat? Emerging technologies and global economic development are the likely candidates. Today’s valuations may be justified, if this is the case. The market may simply be discounting ahead – i.e., performing its normal function.
After decades of turmoil, the bear-market case is easier to grasp than its bull-market counterpart. But powerful breakouts following generational bear markets are known to initiate bull-market eras. Price behavior is begging the question: What could go right? The potential for earnings revival should not be dismissed.
What else might support the secular-bull-market case?
Hmmm… let’s see. Monetary doctrine has made corporate currencies – a.k.a. equities – the object of inflation. Could this persist? Why not?
If I projected the price of gold to $1800 by 2022 and $8200 by 2042, few would flinch. But these are the same proportions as Dow 30k and 140k. Let’s keep an open mind to the meaning of inflation. A poorly understood phenomenon, in my opinion. Especially by the geniuses in Washington who are driving the monetary boat.
The best prediction is no prediction. But one thing is certain. The world will look very different by mid-century. The implications of emerging technologies, global economic development, and monetary doctrine are hard to fathom. Let’s maintain an open mind to all market outcomes, including the secular-bull-market case.