The ASX200 finally took out its previous record high set in November 2007

So, for now, the multiple expansion story is winning out. But, generally collapsing yields and a race to the bottom from global central banks is not a good news story. And the deteriorating growth and lacklustre corporate earnings outlook is largely ignored at current equity prices with the anticipation of central bank support already formidable given the market is pricing a terminal rate of 0.49% by July 2020.  

So that leaves little else to propel further multiple expansion without a material uplift in corporate earnings growth. The bar has been lowered sufficiently when it comes to the upcoming August earnings season such that companies should meet expectations. The worry? Currently FY20 EPS estimates are forecasting an uplift from FY19 earnings, so a V-shaped recovery in the outlook for corporate profits, which is optimistic against the current economic backdrop. This leaves a very small margin for error if this in fact becomes a more L shaped recovery, based on subdued outlooks from companies reporting throughout August given economic growth in Australia remains below trend, a manufacturing slowdown drags on global economy, trade war lingers, and Chinese growth slows – meaning that growth is likely to remain tepid at best and there is a myriad of factors weighing on revenue growth. If this sentiment is reflected in company outlooks then this could lead FY20 estimates to be lowered, whilst valuations are already stretched and priced for perfect execution of an earnings uplift and cycle upswing.

What lies beyond taking out this fresh record high is less certain, with the ASX200 having risen 21% year to date and valuations stretched relative to historical averages, the market could be ripe for a retracement.

PE expansion over 1 standard deviation from the average 12-month forward PE is historically unsustainable:

The concern now would be that the next large move for the ASX200 is not a bullish one, given the deterioration in corporate earnings, whilst already a formidable amount of central bank easing is priced. FY19 EPS estimates for some sectors of the market have fallen from +9% to just 1%, consistent with the exhausted growth outlook. You don’t want to be the marginal buyer when valuations are high, and no material growth upswing is visible on the horizon. But once valuations have corrected, the value proposition becomes more attractive as yields are likely to remain low for an extended period, and the dip would likely be bought.

ASX 200 dividend yield premium vs. bond yields at decade highs: