Very Int from BofA-
All the drivers of the 21st century valuation model are reversing, according to BofA Securities.
The "S&P500 (
SP500) (NYSEARCA:
SPY) generated $220 of EPS past 12 months," strategist Michael Hartnett in the weekly FlowShow note Friday.
Applying "a 20th century PE of roughly 15x gets
you to an S&P500 index of 3300 (our view),
applying a 21st century PE of 20x
gets you to an S&P500 of 4400."
But the drivers of the 20x PE - QE, fiscal austerity, free movement of trade and people, people and capital and geopolitical peace - are ebbing away, Hartnett said.
The new regime of higher inflation means that the "secular view remains cash, commodities, volatility to outperform bonds & stocks" and "inflation in things we don't have enough of: energy, workers, places to rent, food, raw materials, good infrastructure, military equipment."
Deflation will be in government debt, office space, mobile phones and
streaming content, he added.
Investors should wait until the S&P 3,600/3,700 area to nibble on equities with new highs in yields (
TBT) (
TLT) (
SHY) and new lows in stocks (
SPY) (
QQQ) (
IWM) arrive, Hartnett said.
Looking to the broader economy, Hartnett said that the housing sector is the only part of the economy showing "sinister trends." Nominal growth is still being boosted by "inflation, fiscal stimulus, past era of wealth accumulation, new era of 'economic cancel culture' (economic pain elicits immediate public sector bailout)."
War is always inflationary, he added.
