US stocks tumble from an expensive starting point
The correction under way in US equities has started from a point of extremely expensive valuations relative to earnings and bond yields.
A sharp correction is under way in US stock prices, where equities are down about 10% over the past month.
The correction is happening against the backdrop of measures of long-term valuations – which unfortunately never provide any short-term signals on timing – that suggest US equities are extremely expensive relative to both earnings and government bonds.
For example, the Shiller price-earnings ratio, which compares real stock prices with average real earnings over the past ten years, recently plateaued at about 37 from late 2024 to early 2025, broadly matching the peak reached in 2021 and only surpassed by the all-time high of 44 reached in the dot-com bubble of 1999-00.
At the same time, CCI calculates that stocks are yielding little in the way of a premium over risk-free assets, with the median Fed measure of the equity prick premium, which compares the forward earnings yield on stocks with different measures of real government bond yields, falling to 2.6% in February, down from the long-term average premium of 4.7% and only beaten by the the absence of any premium at the height of the dot-com boom.
Investors are clearly unsettled by the Trump administration’s tariff policies given the size and breadth of the planned tariffs greatly exceed what Wall Street had anticipated, with the haphazard scheduling of different tariffs underpinning a surge in estimated uncertainty about economic policy to the highest point outside of COVID (trade policy has led this move, but there is also a surge in uncertainty about nearly every aspect of government policy).
For its part, the administration needs tariff revenue to partly pay for expensive tax cuts and it is hoping that people look past the economic damage caused by tariffs and extreme policy uncertainty to that eventual fiscal stimulus.
The government is probably also hoping that the Federal Reserve will act as a partial cushion against economic weakness by resuming cutting interest rates over coming months.
However, there is a clear possibility that the Fed’s hands end up tied by higher inflation, where manufacturing surveys are already pointing to sharp pressure from rising goods prices and some consumer surveys are registering a sharp pick-up in both near- and medium-term inflation expectations.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
........
Investment Disclaimer
Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT).
Forward-Looking Disclaimer
This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.
Never miss an update
Get the latest insights from me in your inbox when they’re published.
4 topics
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Comments
Comments
Sign In or Join Free to comment