Siegel On Why Stocks Could Rise 30%

Siegel Stocks 30%, Siegel On Why Stocks Could Rise 30%

The chart below overlays the “inflation-adjusted” S&P 500 index over the long-term valuation bands. The current excess valuation levels rival that of some of the most critical mean reversions in history. As Carl Swenlin noted recently:

“Historically, price has usually remained below the top of the normal value range (red line); however, since about 1998, it has not been uncommon for price to exceed normal overvalue levels, sometimes by a lot. The market has been mostly overvalued since 1992, and it has not been undervalued since 1984. We could say that this is the ‘new normal,’ except that it isn’t normal by GAAP (Generally Accepted Accounting Principles) standards.”

Siegel Stocks 30%, Siegel On Why Stocks Could Rise 30%

The hope, as always, is that earnings will rise to justify the over-valuation of the market. However, when earnings are rising, so are the markets. As such, the reversions always occur with prices catching down to earnings.

 

Speaking Of GAAP

As Carl noted, there is nothing normal with GAAP earnings. Of course, today, most companies report “operating” earnings which obfuscate profitability by excluding all the “bad stuff.” However, as discussed previously, there is a tremendous amount of manipulation in both operating and reported earnings. To wit:

The reason companies do this is simple: stock-based compensation. Today, more than ever, corporate executives have a large percentage of their compensation tied to stock performance. A “miss” of Wall Street expectations can lead to a large penalty in the companies stock price.

In a survey conducted with corporate executives, 93% of the respondents pointed to ‘influence on stock price’ and ‘outside pressure’ as the reason for manipulating earnings figures.”

The following table shows the expectations for reported earnings growth:

  • 2020 (actual) = $94.13 / share
  • 2021 (estimate) = $158.97  (Increase of 68.89% over 2020)
  • 2022 (estimate) = $183.76  (Increase of 95.21% over 2020)

The chart below uses these earnings estimates and assumes NO price increase for the S&P 500 through 2022. Such would reduce valuations from 43x earnings currently to roughly 23x earnings in 2022. (That valuation level remains near previous bull market peak valuations.)

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