Thirty five consecutive year on year expansions in the cyclically adjusted P/E ratio* for the S&P 500 index now look set to have all but ended.
With earnings growth having turned negative (here) and with centrally manipulated interest rates at rock bottom, a serious question now needs answering: what can possibly drive stock prices up once again?
An increase in the growth rate of the money supply is a prime candidate. Banks appear fatigued however as bank credit growth has slowed (here).
QE4 is another candidate, but possibly only if it involves buying securities predominantly from the non-bank public (buying from banks arguably would have little effect as they are already flushed with excess reserves) or buying equity securities (anything goes at the Fed in times of crisis these days...).
Whatever the Fed decides, it could prove too late already. An extremely volatile autumn is already here.
* CPI adjusted price divided by 10-year average CPI adjusted earnings as calculated by professor Shiller.