“The boom in share prices is confusing some analysts. The basic problem, as John Authers notes in the Financial Times, is that since September 2011, ‘global earnings per share have been flat.’
So what rising share prices suggest is that investors are willing to pay more for a given level of earnings. ‘Price/earnings multiples have gone from 12 to 16 in the process.’
In the City jargon, this is known as a ‘re-rating’. It suggests that investors are feeling upbeat about the future, and that they expect earnings growth to improve (because otherwise you wouldn’t be willing to pay an apparently high price for today’s earnings).
The trouble is, that might make sense if there was any hint that profits would soar in the foreseeable future. However, profit margins are already at record levels. If anything, you’d expect them to drop back closer to their historical average.
So what’s driving this enthusiasm for stocks? I’m sure you’ve already guessed:
From Money Week