We are back in Singapore after three weeks on the road meeting clients. As we noted last week, there had been a growing perception or prevailing bias that equities are now in a “crash up” phase. Over the past year, the S&P500 is up 34% and the MSCI World index is up 28%. Approximately 80% of that return has been valuation expansion. By contrast, the contribution from earnings growth has been modest. Stated differently, returns have mostly been driven by easier financial conditions and perceptions of risk, not fundamentals. Of course, these factors are reflexive or self-reinforcing. Perversely investors will pay a higher valuation multiple when they are confident, or consensus beliefs are optimistic. They probably ought to do the opposite except in a strong momentum driven market.
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