Thread by @TimmerFidelity

A year into a new bull market cycle, the valuation-driven phase is giving way to a more mature earnings-driven cycle. This chart shows the interplay between the deltas of total return, valuation & earnings. Note the similarities of our current cycle & the GFC. THREAD/1

In March 2009, the S&P 500 finally bottomed after a 57% decline. As is typical for this type of cycle, price bottomed several quarters before earnings. The blue bars below show the year-over-year change in the P/E ratio and the pink bars show the change in EPS. /2

Note how changes in earnings and valuation tend to be almost a mirror image of each other. The dark blue line is the year-over-year total return for the SPX. /3

From Mar 2009 to Apr 2010, the rally was driven by “junk” (low-priced stocks w/ poor balance sheets). By the time earnings growth flipped to positive, the annual return for the SPX had already peaked. What followed was a 13% correction in real terms from Apr 2010 to Jul 2010. /4

We seem to be at similar place now, with earnings growth flipping positive while valuation is peaking. With the current focus on rising inflation and what that means for the Fed, the backdrop is similar to 2010. /END