Mike,
Another reason the valuations are getting so high is because we've been living in a dream-world economy: low inflation, moderate growth, and low unemployment. Though companies' earnings haven't been growing as fast as the stock prices, the earnings and revenue have been growing at a very healthy rate for a long time.
I think there is a fallacy in that argument. According to my way of thinking, a capital asset's value is based on the expectations we as investors have of its ability to generate cash flow (not earnings!). So, all other things being equal, there should be a relationship between cash flow forecasts and stock prices. Now consider a company like CSCO that has good earnings visibility (and a gaggle of analysts following it). Given the fact that interest rates have increased over the last year, and given the fact that there is little material change in CSCO's prospects, how do you rationally explain the fact that the price is up by around 150% over where it was a year ago?
My feeling is that the market is being driven by money pouring into retirement accounts, and that money needs to be invested. Thus, so long as employment remains high (particularly among engineers and programmers who have a penchant for tech stocks), the market will continue to rise. But when the inevitable slowdown occurs (and it will) watch out below.
TTFN,
CTC |
