“Stocks have been at very high levels compared with a very weak economy,” commented Sri-Kumar, the chief global strategist at TCW. “When QE2 was introduced last August, you got a rally in equities prices for several months, but you didn’t get a big push up in economic growth.”
Other analysts point out that analysts’ profit forecasts may be too high. “Also unsaid was the impact of recession on earnings,” Barry Ritholtz, chief executive at quantitative research firm Fusion IQ, commented on the Bloomberg report.
“The Reagan Recession came at the end of a 16-year bear market, plus benefited from [Federal Reserve Chairman Paul Volcker] breaking the back of inflation. The threat today is a Japan-like deflationary spiral, including falling asset prices and an unwillingness for investors to buy up for a dollar of earnings,” Ritholtz wrote. “In other words, a falling [price-to-earnings ratio] could be evidence of an ongoing deflationary phase, and not proof that markets are cheap.”
SPDR S&P 500 ETF (NYSEArca: SPY)
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY.