Now that the Fed is continuing their wind down of asset purchases, can we expect to see a market cliff dive? From a mathematical standpoint, the answer is no. Earnings yields on the S&P is 5.04%, with earnings expected to increase 7.34% over the next 12 months. Compared with a 10 yield of 2.43%, statistically we can expect another 10% higher in the S&P over the next 12 months.
Debt levels are now over their long term average, but earnings are outpacing interest costs so party on Garth. Obviously the debt burden combined with an inabilty to service the interest at a higher rate will kill the bull, but not this earnings season. Perversely, the Fed walking away will force banks to take on more risk, and they look at these models and see that there is some more blood in these corporate rocks to squeeze.
We remain in buy the dip mode, with an expectation that we will see a more sine wave look to the market to give us some nice trading opportunities.
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