And they might get more expensive (in the short-term). But it does not mean that you should invest in them anyway.
As we discuss regularly on our weekly webinar, valuations are stretched: The 10 year average price to earnings ratio is 14.1.
The 12 month forward price to earnings ratio is currently at 16.1. In May, when the S&P 500 peaked it reached 17.
Not only that, with 90% of companies reporting earnings for Q3 and 74% beating expectations, earnings actually declined by 1.8%.
That makes for the second quarter in a row that earnings growth will have been negative (and that hasn't happened since 2009).
Expectations for Q4 2015 earnings are a decline of 3.6%.
In fact, for the year 2015 expectations are now for a decline in earnings growth of .3%.
What makes them more expensive, is that corporations have continued to reduce the amount of shares available (with share buy-backs) therefore making earnings per share look better than they might have in previous years.
In other words, earnings have in fact declined more on a $ for $ basis.
Behind the scenes, revenues have declined more than earnings.
This means that S&P 500 companies have been forced to cut costs more. They have not been investing in future growth.
What investors/traders are doing right now is buying risk assets hoping that they will continue to move higher (get more expensive) and that will provide them with growth regardless of what the fundamentals (revenue and earnings) are suggesting.
Remember gold in 2011 at 1920?
Markets will rise as long as there is buying. When the buying stops?
It is musical chairs. Make sure you have a chair. Or cash.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist