In the past week alone three big market “skeptics” tried to take center stage and herald their bearish forecasts. We’ll take a look at their arguments below. I’ve been on the record for months now that based on our analysis, equity markets should be higher in the future.

Skeptic #1: A high-profile hedge fund manager with an impressive long-term track record suggested that equity investors are likely headed toward a “lost decade” after suggesting “cash is trash” just five short months ago, weeks before the February 2020 high in the S&P. This conclusion is apparently based on a forecast that U.S. corporate profit margins are about to experience a sharp and sustained decline.

Yes, profit margins for 2Q20, and maybe 3Q20, will take an initial hit from their historically high levels as profits fall as a direct result of the self-imposed nationwide and global lockdowns. However, our research suggests that they will rebound sharply and will RISE in the coming year. According to our historical analysis, equity markets will likely reflect where things are going and not where they are now during this blip.

Skeptic #2: A notable value investor known for his historical bearish calls—not all correct—said: the U.S. stock market is in an unprecedented bubble that will end badly: the rally is without precedent and takes place against a background of undeniable economic problems. Additionally, it is difficult to imagine when the broad economy will completely recover from the effects of the pandemic; and the current P/E on the U.S. market is in extreme.

After reviewing his comments, I needed a break to sit back and absorb everything. I’ve addressed this before. Yes, the market rally will end at some point, but our research says that it will be from higher levels and not in the foreseeable future. And yes, the equity market is going up while the economy is still struggling. However, our historical analysis shows that is nearly always the case when coming out of a trough. It will take time for economies to completely recover. what stocks need to provide positive returns for investors is first moving from less bad, second derivative improvement, then shifting to levels of good, and finally to some acceleration. My work shows this has already started. As for the “high PE” our research on long-term multiples shows that once all factors that contribute to valuation are included the current readings are NOT extreme. In fact, they may move even higher before the rally has finally run its course.

Skeptic #3: There have been several recent reports that measure broad-based investor sentiment released this week. Two bearish points stand out (which are contrarian favorable in my view): Over 50% still think it’s a bear market rally, and a record net 78% of investors say stock market most overvalued since 1998.

Massive Overvaluation is not the problem. Suggesting that there is a bubble in equities and that valuation is massively extreme are a couple of the favorite negative arguments for the bears, and again our research does not support these views.

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