In a climate where bullish forecasts dominate Wall Street, David Rosenberg, founder of Rosenberg Research, stands out with his consistently bearish perspective on the economy and markets. Notably known for his prescient call on the 2008 recession, Rosenberg often provides insights that merit careful consideration, despite the fact that his predictions don’t always materialize.
In a recent communication to clients, Rosenberg raised alarm about the S&P 500’s future returns amid concerning valuations. Currently, the index’s Shiller cyclically adjusted price-to-earnings (CAPE) ratio is sitting at approximately 37.5, marking it as the third-highest valuation historically, trailing only behind peaks observed in 2021 and 2022. This ratio, which averages earnings over a decade to smooth out business cycles, serves as a key indicator of market valuation.
Such high valuations historically correlate with poor long-term stock market performance. According to data from Bank of America, original valuations can account for about 80% of market performance in the subsequent decade. Major financial institutions like Morgan Stanley and Goldman Sachs previously highlighted the likelihood of subdued returns linked to elevated valuations. While short-term performance can be erratic, Rosenberg’s findings portray a dismal picture: in similar historical contexts where the CAPE ratio exceeded 35, one-year forward returns have consistently been negative. “It’s the only cutoff point where every single time is negative,” he emphasized in a recent interview.
Yet, valuations alone are not the crux of Rosenberg’s concern. He argues that rising expectations, set against a backdrop of weakening economic indicators, amplify the risks. The labor market, for instance, shows signs of cooling, with job growth dipping below 100,000 per month over the past four months. The Bureau of Labor Statistics reported this week that the economy has added 911,000 fewer jobs than previously estimated in the year up to March.
Rosenberg noted a troubling trend in initial jobless claims, which surged to 263,000 the previous week, surpassing economists’ expectations. He contends that such figures should exert downward pressure on payroll growth, hinting that the U.S. economy may already be in or nearing a downturn. “What we know arithmetically is that the hiring rate today is so low that once you cross above 240,000 on claims, it triggers a negative impulse on nonfarm payrolls,” he said, predicting adverse implications in the upcoming September data.
Moreover, the ongoing rise in stock prices, even amid these warning signs, suggests a state of euphoric investor sentiment, according to Rosenberg. “This is what a euphoric state looks like, we’re seeing it in real time,” he remarked, asserting that such conditions indicate a price bubble. He stated, “We are in a gigantic price bubble that is ongoing,” highlighting that rising stock prices amidst negative fundamentals serve as a clear signal of this phenomenon.
Investors are thus urged to reconcile their strategies with both Rosenberg’s cautionary insights and the prevailing optimistic sentiment pervading the market. In an environment that is increasingly testing the resilience of economic fundamentals, his analysis could prove invaluable for those navigating the complexities of current market dynamics.
