The equity markets are generally forward-looking. That’s why you have price movements that seem incompatible with the latest economic (backward-looking) data. The equity market today, as seen through the eyes of the S&P 500, has been flirting with all-time highs while the economic data indicate that the economy continues on feeble legs. So, just as the “forward-looking” market has predicted 25 of the last 8 recessions, so too, it can send false signals as to the future economic growth path. Today, the S&P 500’s forward P/E ratio is 19x (18x on a trailing basis) — in nosebleed territory. But the underlying data do not indicate that we are soon to have a boom in corporate profits, or more rapid consumption growth.
This is not to say a general recession is imminent. The job market is too strong for that. But if we don’t soon get some indicators of robust consumption growth and a corporate profits turnaround, the equity market will stall and we will likely see another correction leg.