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Stock market gains will slow as key factors such as valuations and interest rates reach extremes, David Rosenberg said.
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He said operating profits must rise to drive further market gains.
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“There are few incentives left to keep the stock lot going,” Rosenberg said.
The main drivers of the significant stock market gains over the past three decades are approaching their extremes, suggesting that future returns will be significantly lower.
That’s according to economist David Rosenberg, who warned clients in a note on Wednesday to prepare for a period of limited appreciation of US stocks.
“There are few incentives left to keep the stock lot going,” Rosenberg said.
Rosenberg is particularly concerned about recent developments in valuations, interest rates and taxes. According to Rosenberg, they have reached their limit, which could put downward pressure on corporate profits and therefore share prices.
These are the three factors that Rosenberg is concerned about.
The S&P 500’s price-to-earnings ratio of 22.3x is more than one standard deviation above the historical norm and represents the highest level since the peak of the COVID-era tech bubble in 2021, Rosenberg noted.
These high valuations, combined with extremely bullish sentiment that has exceeded levels seen just before the Great Financial Crisis, suggest to Rosenberg that there is little room for more upside in valuations.
“There is no room for further multiple expansion,” Rosenberg said.
Higher stock market valuations would largely depend on continued corporate earnings growth, but Rosenberg said there are reasons to believe this is unlikely.
Corporate tax rates have been falling for decades, helping corporate profits rise and stock prices rise.
While the Trump trade hinges on possible legislation to drop the corporate tax rate from 21% to 15%, Rosenberg thinks this is unlikely.
“A wafer-thin majority in the House of Representatives and the already low rates mean that the runway is also much shorter here,” said Rosenberg.
With the effective corporate tax rate at 17%, Rosenberg argues there is little room for it to drop further, even with Republican control of the White House and Congress.
Falling interest rates have long contributed to stock market gains, but that trend may be nearing an end.
While the Federal Reserve is cutting interest rates, they are already near historic lows, suggesting there is not much room to fall further, especially if newly-elected Trump’s agenda is inflationary.
