A question of multiples...

Last Friday's sharp correction in the markets to commemorate the 20 year anniversary of black Monday reflects growing unease on the earnings momentum front. Just when the markets were thinking that the worst was behind us, disappointment in earnings forecasts reared its ugly head. Although the markets have surged pretty much consistently since 2002, roughly doubling in value, earnings have followed suit, keeping multiples steady at reasonable levels. The risk at this stage, however, is that the continued trouble in the housing market, record commodity prices, dwindling productivity and a possible slump in consumer spending begins to eat into earnings. Some analysts are betting on the more sanguine environment outside of the U.S. combined with the decoupling theme to come to the rescue. It is, however, important to heed the warning signs of an overheating Chinese market, trading at sky high multiples, and growing pressure for an appreciation of the currency. The futures market is already pricing a 25 basis point Fed ease for its next meeting at the end of the month.