In a recent Barron’s column, Jeremy Grantham penned a tortuous essay outlining the obvious: Stock markets do not see large-scale P/E ratio compression outside of recessionary US economic conditions. In short, he says the equity market’s currently elevated P/E ratio is simply a reflection of high profit margins and low inflation, and until either one or both factors change, the market is unlikely to decline materially.
Interestingly, Financial Times columnist Rana Foroohar recently outlined, albeit indirectly, what could simultaneously drive inflation and margin compression: A secular political movement away from “capital” and toward “labor”, driven by Millennials’ deep-seated desire to earn above-market rates of compensation (i.e. have everything handed to them).
Something to watch.