Valuations are high and foundations are thin

The disconnect between market valuations and underlying economic durability is becoming impossible to ignore.

- Hugh Selby-Smith, Talaria Asset Management

Equity markets are riding high, particularly in the United States, where the S&P 500 is near its all-time peak. But it’s the foundations supporting that confidence that are far less convincing.

The defining theme for financial markets today is the transition in monetary regimes.

The era of global integration, disinflation and expanding private balance sheets is being replaced by one of higher public debt and more interventionist government policy. This shift is critical because much of today’s market optimism rests on conditions that are unlikely to stick around.

Earnings growth in large US companies has driven returns, but that growth has been closely tied to government spending and rising deficits rather than broad-based economic strength. In the United States, interest payments on government debt are nearing US$1 trillion, while total corporate tax receipts amount to just US$452 billion.