Something helpful as we deign to determine whether or not stocks are cheap based on earnings here from my pal Doug Kass…
- The two most important factors affecting stock market valuations are interest rates and corporate profits.
For now, interest rates are anchored at low rates, near zero, and, as such, are supportive of market valuations. As I mentioned on The Kudlow Report Tuesday night, risk premiums (earnings yield less the risk-free cost of capital) are back up to 1974 levels. And following that ramp up, the S&P 500 rose by 32% in 1975 and by 19% in 1976.
Profit Margins Are Now Vulnerable
With regard to corporate profits, though the markets paid little attention, Wednesday’s unit-labor cost report was an important variable that could dent corporate profitability in the months ahead.
Remember that corporate profit margins are among the most mean-reverting economic series extant.