Central banks can save multiples in the short run

Global equity valuations are to back firm levels above the average since 1999. The rebound in equity valuations, given the lower realized earnings growth, can only be explained by the required rate of return (discount rate) falling faster than growth expectations which is naturally a function of falling interest rates in the US. But given the signals from bond markets and the ongoing US-China trade war it is difficult to reconcile the current valuation as it implies strong growth outlook. At some point, something must give.

But if earnings growth goes negative, as we expect in Q4, and medium earnings growth expectations were revised lower by investors then equities should meaningfully adjust downward. The three most important industries for global equities are banks, software and media & entertainment, and banks will surely begin to suffer from lower rates. Media & entertainment companies far more vulnerable to the failing “strong consumer” narrative as consumer confidence dictates advertising pricing power.

Finally, the breakdown of IPO stocks from the rest of the equity market and the spectacular implosion of WeWork highlights a growing divergence in growth outlook between the private market and public market. It smells a bit like 2000 and could be the catalyst for longer term growth revisions.