WEAKER ECONOMIC DATA , BUT EQUITY MARKETS HIT NEW HIGHS

Recent Purchasing Managers ’ Indices ( PMI ) data has dropped off the very strong numbers we have seen for most of this year and macroeconomic data surprises have turned negative , so why have equity markets charged higher ? Recent macro data has disappointed , but equities have surprised to the upside There is an abundance of challenges in the economic backdrop : talk of tapering from central banks , Government deficits continue to pile higher , inflation is creeping up past target levels and unemployment remains stubbornly high . Yet markets have continued upwards , with the S & P500 at double the value of its March 2020 low . There must be something driving markets higher , and a closer inspection of earnings season provides a lot of colour . Chart 1 shows that the continued bull market in equities mirrors the meteoric rise in earnings . Over the past year , stock prices have struggled to keep pace with improving earnings projections , leading to forward Price / Earnings ( P / E ) multiple declines . Valuations have fallen from their highs but still remain elevated relative to long-term averages due to low rates and tight spreads .