So, I'm calling it. Of course, not calling a precise date, but I don't see how the US stockmarket continues up over the medium term, with a likely crash in 2019. Tax reform could drive EPS growth another few quarters, but I am less confident about what we see when that annualizes and investors see reducing growth on earnings.
As for the market itself, I think we signaled the peak when Amazon hit a trillion dollors, versus a US GDP of about $21T. Amazon is an amazing company, but it made $3B in net income last year and has no intent to drive profit growth, ever in my opinion. So tough to say why that's worth $1T. And even if the analysts can create a model to justify Amazon's valuation, the net impact to the economy is much less as all the competitors continue to reduce profits to survive.
The stockmarket growth has been too narrow. The FANG companies have driven most of the gains, in a market that is already less representative than it used to be. In the mid-1990s, there were more than 8,000 public companies. By 2016, there were only 3,627, according to data from the Center for Research in Security Prices at the University of Chicago Booth School of Business. "That creates opportunities for private equity firms, which have insider access to innovative start-ups that may never go directly to the public markets. Meanwhile, Main Street investors are consigned to a less diverse universe than they may realize..."(NYTimes)
At the same time, the rise of passive investing and ETFs has changed the profile of the market. How that could compound reversals in sentiment is truly unknown, but it has likely been a factor in helping prolong the bull run for so long and so will likely help it go the other way at even faster speeds.
What could tip the market scales towards decline? If we knew, we'd avoid it, wouldn't we? One thing we do know is that, post tax reform, it is very likely that the US deficit will get worse. The US Congressional Budget Office now forecasts that the first annual deficit in excess of $1 trillion will be reached in 2020. As Trump's trade and foreign policy likely continues to make the global economy slower, not faster, that could well impact US growth too.
In the summer of 2007, there was little talk of a market crash and recession while the market continued to trade at high. In the fall, the declines in the housing market started to register but stock market confidence remained relatively strong. Only much later in 2008 did the market itself crash significantly. Perhaps 2018-19 will see a similar pattern.
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