The stock market in 2024 has rallied strongly on a combination of growing earnings and expanding P/E-multiples. The same thing happened in 2017, which was the first calendar year of Trump 45. Then in 2018 earnings continued to grow but valuations started to compress (as is typical). With the trailing P/E already at 26x and up 29% year-over-year, is it realistic to expect a repeat in 2025? I don’t think so. It’s not difficult to see earnings continue to grow in 2025, but in my view, they will have to do most if not all the heavy lifting. Perhaps 2025 will be more like 2018❓
In the scatter chart we can see the historical ebbs and flows of earnings vs valuations, going back 150 years. The correlation has been generally negative, for the simple reason that price discounts earnings growth by several quarters. Therefore, price (and by extension the P/E-multiple) is usually zigging while earning growth is zagging. The exceptions to this rule are the soft landing Goldilocks cycles, such as the mid-1990’s and mid-2010’s.