Earnings growth expectations are weak, manufacturing activity is decelerating, the dollar is strengthening, commodity prices are deteriorating, and business spending is anemic.
Yet stocks have been rallying.
In a new research note titled “Remember The 80s?” Deutsche Bank’s David Bianco reminds us that these dynamics are not unprecedented.
“1967, 1985-86 and 1995 have the weakest economic mid-cycle manufacturing ISM since 1960,” he wrote.
“We see 1985-86 as very similar to now: a stronger dollar and weaker commodity prices, soft business spending and weak exports. This caused 1985-86 to have the weakest non recession EPS growth. Yet, the S&P delivered strong gains as its PE expanded from about 10x in 1984 to 15-17x by 1986 as investors became more trusting that inflation risks had dissipated and accepting of secularly lower interest.”