“The stock market continues to rise rapidly while performing a significant excess of the growth stocks. The future earnings multiplier of the S&P 500 index has risen to almost 19 from the low of June 16, while the index is increasing and profit forecasts are decreasing. The earnings multiplier should also depend, among other things, on the level of interest. According to the yield The projected excess of the S&P 500 (inverse future multiplier) over the Fed interest rate, the stock market is now the most expensive since 2008. Assuming interest rates continue to rise according to the markets’ forecast and the multiplier remains unchanged, the situation is going to get even more extreme towards the end of the year.” This is what Alex Zebzinski, Meitav Dash’s chief economist, writes in his weekly review.
“In order for the current multiplier to be less extreme in relation to the FED interest rate, the interest rate should decrease and/or the companies’ profitability should increase and lower the multiplier. However, it is more likely that the exact opposite will happen and the share pricing in relation to the interest rate will be even more extreme. Also in relation to the alternative of investing in rated bonds “The stock investment is now the most expensive since 2008,” he writes.
Regarding the American bond market, he notes that the risk premium for the time (Term Premium) in the American 10-year bond published by Bloomberg is at a negative level of minus 68%, one of the lowest ever. “If it weren’t for the negative risk premium, yield The 10-year bond would have been around 3.5%, which was and is a more logical reflection of the existing risks. If it weren’t for such a negative time premium, the yield curve would not have inverted. By the way, when the curve inverted in the past, the risk premium of the bond H for 10 years was actually positive.”
“The headwind to the bond market is expected to increase not only because we believe that interest rate increases will be higher than forecast, but also because of the expected increase in the supply of bonds. First, starting in September, the FED is going to double the balance sheet reduction rate from 45 to 90 billion dollars per month. Second, the US Treasury is going to increase the cash balance in the treasury from 570 to 700 billion dollars by the end of the year, as it recently announced, in contrast to the decrease in the treasury in recent months.”
He also notes that in Israel there are almost no signs of a slowdown in the economy and the rate of inflation is expected to continue to rise for at least a few more months, but the expectations for the 3-month interest rate in 9 months have decreased from mid-June to 2.4% from about 3.5%, compared to a decrease from about 4.2% to -3.8% in the US. “Apparently the strengthening of the shekel can explain a sharp drop in expectations in Israel. However, there is a certain contradiction here. The strengthening of the shekel depends on continued increases in the stock market which can exist if there is no recession or sharp slowdown. However, without a recession or a significant slowdown, it will be more difficult to return inflation to the target, which should push for a stronger increase in interest rates in the US and affect Israel as well.”