Still, Colas does some back-of-the-envelope math to test his hypothesis. If investors believe one of the old chestnuts of investing wisdom, the “rule of 20,” they are expecting 17.5 times earnings. (The “rule” says that expected price-earnings ratios plus inflation, expressed by rates, totals 20. DataTrek assumes 2.5% on the 10-year U.S. note
is around 3,100, the 17.5 multiple implies earnings of $177 a share, an 8.6% premium over this year’s $163 a share. That is not bad for corporate results in a decade-old expansion. More to the point, Colas notes, “easy comps” can be an especially “powerful” narrative for investors.
“Valuations end up leading fundamentals, sometimes to absurd levels,” Colas said. “Unless U.S.-China trade talks hit a large pothole in coming weeks, that’s the narrative that should continue to drive US equity prices higher through the end of the year.”