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In a diagram: The unbelievable backdrop to the worldwide inventory market rally – earnings have been unchanged since 2008

As the debate between the discrepancy between the stock market and the real economy continues to play with US stocks at record highs, a chart makes the difference clear.

It's a chart that looks at global stocks and global earnings per share. The EPS is measured here on a 12-month basis, and the analysts assume an almost complete recovery from the COVID-19 pandemic.

The graphic shows global earnings per share unchanged from 2008. In other words, stocks are not only segregated from economic performance, but also from the profits of the companies they appear to represent.

“This remarkable observation leads to a salutary conclusion. The global stock market has nearly doubled since 2008 as the multiple paid for unchanged profits has nearly doubled, ”said Dhaval Joshi, chief strategist for European investments at BCA Research.

The reason it has increased multiple times is because global bond yields have collapsed, making the relative valuation for stocks stronger. Joshi took a simple 10-year US Treasury Department average
TMUBMUSD10Y,
1.092%,
the foundation of global markets and, as a proxy for higher risk countries, the Italian 10-year Ministry of Finance
TMBMKIT-10Y,
0.722%.

He said the global rally could continue until the 10-year US and Italy return hit zero. On Thursday, the US 10-year yield hit 1.09% and the Italian 10-year 0.62%.

While profits are flat around the world, it is not on an industry and country basis. Thanks to the tech sector, profits are up 55% in the US and 25% in South Korea. In Denmark, which depends on health, profits have increased by 40%. In Spain, Italy and Austria, on the other hand, profits have fallen by 45% to 55% due to their exposure to banks.

“An important message for long-term investors is that if a sector's profits structurally decline, they are incurable. It is almost unknown that these sectors are returning to structural growth. In addition, the support of the sector price from falling bond yields is insufficient to offset the weight of collapsing earnings. In any case, bond yields cannot fall forever, ”Joshi said.

Both the S&P 500
SPX,
+ 0.03%
and Nasdaq Composite
COMP,
+ 0.55%
ended on Wednesday on records and the Nikkei 225
NIK,
-0.44%
closed on a 30-year high in Tokyo.

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