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Based on forward earnings estimates, many claim the market is "cheap".

Bloomberg cites one of the best rounds of corporate earnings upgrades ever seen in the S&P 500. Combined estimates for 2018 profits among companies in the index have gone from $145.90 a share on Dec. 15 to $156.20 on Friday, a rate of increase that is four times faster than any stretch since at least 2012, data compiled by Bloomberg show.

Things Always Rosy at Tops

Forward earnings are extremely difficult to predict, and estimates are amazingly wrong at market peaks. CAPE ratios tell a better story.

CAPE stands for Cyclically-Adjusted-Price-Earnings (cyclically-adjusted P/Es). CAPE ratios are at rarified-levels seen in 2000, 2007, and 1929.

CAPE Analysis

Research Affiliates provides a stellar case Why CAPE Naysayers Are Wrong.

By dwelling on the potential flaws of a metric such as CAPE, it’s easy to become disillusioned and want to disregard it completely. Before we do that, let’s review what CAPE brings to the table. CAPE shows remarkable efficacy in forecasting long-term equity returns, not just in the United States but across the world,15 providing investors a consistent tool for comparing potential equity market investments. The fit is imperfect, but impressive.

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Every time the CAPE ratio suggests caution, CAPE skeptics suggest we should ignore it. We are highly confident those offering eulogies today for the CAPE ratio are premature—as has been the case repeatedly in the past. We readily acknowledge that the historical average CAPE of 16.6 is a poor guess for today’s equilibrium valuation level, as both Jeremy Siegel and we at Research Affiliates have written about in the past. But even after dickering over accounting rules and growth rates, the fact remains the US equity market looks expensive. If we take out the extremes of 2009, perhaps the current multiple is closer to 29 than 32. If we adjust for accounting rules, perhaps the equilibrium is 20. When the US CAPE hits 20, then we can have a spirited debate about whether we’ve reached fair value or are still a little richly priced.

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That's an excellent article well worth closer scrutiny, but few will listen. More accurately, few can listen.

Mathematically, it is impossible for the masses to heed the warning because someone has to hold every security in existence, 100% of the time.

I suspect even bears will get sucked into this bubble on the belief a 10% or 15% decline makes things cheap. A 15% decline would barely represent a down payment on what's likely to come.

Mike "Mish" Shedlock