There is little doubt that asset prices have responded to Central Bank promises and actions. Even as bottom-up fundamentals are fading, top-down index ‘nominal prices’ rise on the back of magical multiple expansion – which is defended from on high by sell-side strategists the world over on the back of ‘recovery’ is just around the corner. The trouble is there’s a limit and it seems – from QE2 and LTRO – that we are rapidly approaching that limit; and with earnings outlooks being revised lower, perhaps we are at peak P/E for this cycle of QE?
Each line is the normalized gain in P/E from the onset of expectations for Central Bank largesse:
(QE2 – green; LTRO – red; QEtc. – Orange)