We do not believe US equities are currently in a bubble, nor do we think inflation is a current concern. With interest rates so low for so long, increasing leverage in the financial system, and the S&P 500 making record highs, some investors are worried about a repeat of the late 1990s or mid-2000s, particularly with the Federal Reserve printing so much money. We disagree. One feature of an asset bubble is that valuations become unanchored from underlying fundamentals, like stock prices and earnings in the late 1990s or house prices in the mid 2000s. While the S&P 500 started making record highs in April, 12-month trailing earnings have been making new highs for two years, justifying record prices, in our view. Given our belief that the SU is likely to avoid recession next year and that global economic recovery will continue, we think earnings will rise next year, although estimates of 10% growth look overly optimistic to us. We maintain our targets for the S&P 500 of 1800 by year end and 1850 around the middle of next year based on our earnings expectations and Price Matters Framework.

David Fuller's view These are good points. However, influential Wall Street is no longer inexpensive with the fashionable Nasdaq 100 Index trading at an historic PER of over 21 and yielding only 1.44%. The smaller cap Russell 2000 Index is trading at a PER of 32 and yields 1.59%. The Dow Jones Industrial Average is no longer a bargain at a PER of over 15 and a yield of 2.16%. Earnings have been flattered by extensive corporate share buyback programmes. These will mostly cease as QE ends.